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MILES  MENANDER    DAWSON, 


ELEMENTS 


LIFE  INSURANCE, 


MILES  MENANDER   DAWSON. 
V 


New  York  : 
THE  SPECTATOR   COMPANY. 

1896. 


<^ 


Copyright,  1892, 

BY 

Miles  M.  Dawson. 


GENERAL 


ELEMENTS  bF  LIFE  INSURANCE. 


INSURANCE  IN  GENERAL. 

Insurance  is  the  equalization  of  fortune.  By  its  pro- 
visions, a  large  number  of  men  arrange  to  lose  small 
sums  in  order  that  none  of  them  may  lose  a  great 
sum  in  a  specified  way.  Thus  it  is  the  alhance  of 
prudent  men  against  misfortune,  the  most  important 
because  the  most  vital  invention  of  civilization.  In 
so  far  as  insurance  is  applied — and  its  field  grows 
wider  day  by  day — it  transfers  the  burden  of  ill  for- 
tune from  the  shoulders  of  the  individual  to  society, 
thus  serving  to  protect  the  whole.  Freed  from  the 
dread  of  disaster,  the  individual  finds  broader  oppor- 
tunities, and  dares  accept  them. 

This  beneficent  alliance  has  been  brought  about, 
not  bj^  an  appeal  to  sentiment,  but  by  a  direct  appeal 
to  business  men  in  a  business  way.  The  fundamental 
idea  is  indemnity,  the  replacing,  in  whole  or  in  part, 
in  kind  or  in  equivalent,  that  which  is  lost.  To  give 
more  than  the  amount  lost  subverts  the  very  princi- . 
pies  of  insurance,  in  that  it  no  longer  merely  protects 
the  individual  from  disaster,  but  places  before  him 
the  hope  of  gain.  Insurance  undertakes  to  warrant 
to  a  man  the  continued  possession  of  that  which  he 
has;  it  is  contrary  to  its  purpose  to  cause  him  to  wish 
to  lose  what  he  has  in  order  to  possess  himself  of  the 
proceeds  of  the  insurance. 

Originally  men  insured  only  against  those  disasters 
which  were  least  understood  and  most  dreaded,  such 


100794 


as  loss  of  ships  at  sea,  of  life  on  a  long  journey  or 
Yoyage,  of  limb  or  time  by  railway  accident.  The 
common,  e very-day  risks  were  beheld  with  indiffer- 
ence, even  if  such  misfortune  were  not  met  with  equa- 
nimity. A  single  exception  was  that  of  insurance 
against  fire,  a  not  unusual  occurence,  but  one  pecul- 
iarly feared.  Particularly  where  conflagrations 
might  ensue  ^were  the  disasters  because  of  fire  dreaded, 
and  in  conseqvience  ^was  fire  insurance  in  demand. 

The  fixing  of  premium  rates  for  insurance  was  at 
first  largely  a  matter  of  guesswork;  but  the  principle 
was  that  of  averages,  and  in  due  time  the  rules  of 
average  applied.  As  statistics  were  compiled,  classi- 
fications of  hazard  took  place,  and  rates  were  more 
accurately  calculated. 

In  almost  all  sorts  of  insurance  the  hazard  on  a 
given  subject  may  vary  at  different  times  and  for 
various  reasons.  The  risk  of  fire  upon  a  building 
may  vary  because  of  new  or  changed  exposures, 
because  of  alterations  or  new  occupancies  in  the 
building  itself.  The  risk  of  accident  to  an  individual 
may  vary  because  of  change  of  occupation.  But  in 
neither  of  these  does  there  occur  a  constant  change  of 
hazard  characteristic  of  the  subject  of  insurance. 

In  that  respect  as  in  many  others,  two  sorts  of  in- 
surance form  a  class,  the  insurance  of  individuals 
against  death  and  against  illness.  The  latter  is  as 
yet  in  its  infancy,  and  is  besides  foreign  to  the  subject 
in  hand.  But  in  common  with  life  insurance,  it  cov- 
ers a  hazard  which  varies  regularly,  because  of  the 
inherent  character  of  physical  man.  In  life  insurance, 
a  gradual  but  increasing  tendency  to  greater  hazard 


appears  as  the  person  insured  grows  older,  resulting, 
finallj',  in  a  certainty  of  death. 

Really  there  can  be  no  such  thing  as  insurance 
against  death  without  any  modification.  A  man 
would  be  accounted  a  fool  who  would  wager  a  thou- 
sand dollars  that  another  would  never  die.  Insurance 
against  immediate  death  or  against  premature 
death  is  another  matter;  and,  in  fact,  that  is  all  that 
any  company  really  furnishes,  notwithstanding 
appearances.  For  the  rest,  a ''self-assurance  fund" 
or  reserve  is  accumulated  to  pay  the  loss  if  the  insured 
life  survive  until  the  time  when  death  is  accounted 
certain.  The  usual  life  policy,  therefore,  provides, 
first,  for  an  insurance  in  the  ev^ent  of  premature  death, 
and,  second,  for  an  estate  certain  accumulated  from 
the  insured's  own  savings  in  event  of  death  in  the  full- 
ness of  years. 

Owing  to  these  peculiar  considerations,  the  study, 
of  the  science  of  life  insurance  has  been  attended 
b}^  greater  difficulties  than  the  study  of  other 
branches  of  insurance.  Fortunately  the  statistics  of 
hazards  of  lives  are  more  complete  than  any 
other  statistics  employed  in  insurance.  Without 
complete  and  tolerably  accurate  vital  statistics,  it 
w^ould  be  a  dangerous  speculation  to  attempt  to 
estimate  the  hazards  of  lives. 

Another  consideration  would  add  not  a  little  to 
this  perplexity.  In  the  nature  of  things  it  would  not 
do  to  permit  a  life  insurance  company  to  cancel  at 
will  a  contract  entered  into  by  it;  nor  is  it  commonly 
deemed  wise  to  leave  the  company  free  to  renew  the 
same  or  not  at  pleasure.  Since  these  rights,  comn  on 
to  all  other  forms   of  insurance,   are    b^^   the  vt^ry 


nature  of  life  insurance  denied  the  insurers,  it 
behooves  them  to  be  very  careful,  indeed,  as  to  what 
contracts  they  give. 

For  the  same  reasons  the  insurers  of  lives  are  com- 
pelled to  be  cautious  in  granting  such  insurance,  and 
to  require  evidence  that  the  life  to  be  insured  is  at 
least  up  to  the  average  in  apparent  chance  to  reach 
old  age.  To  this  end  an  examination  by  a  physician 
is  required,  and  a  large  and  not  yet  fully  digested 
mass  of  statistics  has  been  collated,  bearing  on  the 
importance  of  the  various  answers  recorded  concern- 
ing the  applicant's  present  physical  condition,  and 
personal  and  family  history.  The  tendency  in  this 
country,  owing  largely  to  the  mutual  or  participat- 
ing system,  has  been  to  discriminate  more  and  more 
closely.  In  England  the  current  has  set  the  other 
way,  even  to  the  point  of  accepting  risks  without  ex- 
pert examination  at  all.  There  is  danger  in  both 
extremes,  for  insurance  should  not  be  lightly  denied 
the  average  man,  conscious  of  no  ill  health  and  equal 
to  his  responsibilities;  to  refuse  insurance  to  such  is 
to  defeat  its  purpose.  On  the  contrary,  men  fully 
equal  to  the  average  in  health  and  strength,  will  be 
found  unwilling  to  pay  beyond  the  measure  of  their 
own  hazard;  and  a  company  requiring  no  examina- 
tion is  likely  to  find  itself  with  impaired  lives  only 
upon  its  books. 

A  thorough  overhauling  of  the  more  or  less  crude 
statistics  now  attainable  would  perhaps  result  in  a 
classification  of  risks  which  would  admit  a  larger 
number  to  the  benefits  of  life  insurance,  while  at  the 
same  time  giving  to  the  better  risks  the  full  advan- 
tage due  them.    Various  plans  have  been    already 


devised  for  this  purpose  and  one  plan  of  dividing 
surplus,  known  as  tontine,  automatically  discrimi- 
nates in  favor  of  those  of  superior  vitality. 

The  principle  of  indemnity  must  not  belost  sight  of 
in  life  insurance.  The  beneficiary  in  a  life  policy 
should  have  an  interest  in  the  life  insured.  Else  the 
contract  is  a  speculation,  a  form  of  gambling  and 
utterly  opposed  to  true  insurance,  which  is  meant  to 
defeat  the  spirit  of  taking  chances,  not  to  foster  it. 

For  the  same  reason  the  amount  of  the  insurance 
should  be  within  the  financial  value  of  the  life  to  the 
beneficiary.  This  question,  because  of  the  overesti- 
mate placed  upon  a  life  by  those  who  love  the  man  as 
husband  and  father,  as  well  as  because  few  men  ex- 
ceed or  even  approach  their  actual  value  in  insurance, 
has  not  received  the  attention  given  to  it  in  other 
lines  of  insurance.  Yet  it  is  of  paramount  importance, 
because  of  public  policy.  One  case  is  now  in  the 
courts  (and  others  have  been),  in  which  murder  for 
the  amount  of  the  insurance  is  charged.  Standards 
whereby  to  measure  the  value  of  a  human  life  are  not 
lacking  in  life  insurance  offices;  and  eventually, 
doubtless,  more  attention  will  be  demanded  by  this 
phase  of  the  problem.  Meanwhile,  the  natural  course 
of  a  life  policy  (and  still  more  of  a  limited  payment 
life  or  endowment)  is  to  reduce  the  amount  of  insur- 
ance as  the  insured  grows  older,  and  to  a  minimum , 
in  old  age.  Thus  a  gradual  and  natural  decrease 
takes  place,  adjusting  the  insurance  to  the  diminish- 
ing value  of  the  life.  This  is  accomplished  by  the  ac- 
cumulation of  the  reserve  for  the  estate-certain,  which 
reduces  by  its  whole  sum  the  actual  insurance  car- 
ried. 


VITAL  STATISTICS. 

To  know  what  statistics  show  to  be  the  average 
risk  of  fire  on  a  certain  class  of  property  during  the 
previous  year  is  enough  for  the  fire  underwriter.  His 
contract  covers  but  one  year  ahead  or,  if  a  longer 
period,  he  has  at  all  times  the  right  to  cancel  when- 
ever in  his  judgment  the  risk  has  increased.  If  he 
were  by  the  nature  of  the  contract  and,  in  fact,  of  the 
business  required  to  warrant  a  price  for  the  insurance 
indefinitely  and  practically  without  the  right  to  can- 
cel before  a  loss  or  contest  after  one,  it  is  probable 
that  he  would  require  much  more  definite  information 
about  the  risk  he  was  assuming. 

In  very  few  cases,  indeed,  would  a  man  accept  alife 
insurance  policy  about  the  renewal  of  which  the  com- 
pany should  reserve  a  choice.  Even  an  option  of 
fixing  a  new  rate  according  to  the  hazard  would 
make  a  life  policy  undesirable.  So  firm  is  the  public 
demand  for  a  closed  contract  that  even  to  dispute  a 
claim  for  fraud,  if  death  has  actually  taken  place,  is 
an  unpopular  move.  No  one  would  even  consider  a 
policy  which  reserved  the  right  to  cancel  at  will. 
When  the  rate  is  not  a  level  one  for  life,  Hie  public 
requires  a  definite  limit  to  be  placed  upon  future  pre- 
miums. The  only  apparent  exception  is  assess- 
ment insurance,  and  even  then  the  company  has  not 
the  right  to  arbitrarily  fix  the  rate.  Men  usually  en- 
ter such  societies  for  cheap,  temporary  insurance ;  if 
they  expect  permanent  insurance,  they  have  been  led 
to  believe  that  the  cost  cannot  exceed  a  certain  figure. 


In  any  case,  all  regular  companies  are  by  the  nature 
of  things  required  to  guarantee  their  rates  through- 
out the  term  of  the  policj- — commonly  for  life. 

If  life  insurance  companies  could  at  their  option 
refuse  to  renew  their  policies  each  year,  even  waiving 
the  right  of  cancellation  during  the  year,  the  rates 
for  insurance  could  be  greatly  reduced.  In  that  case 
the  stud^^  of  vital  statistics  would  be  simplified  into 
the  mere  question  of  in  what  ratio  men  begin- 
ning the  year  in  perfect  health  die  before  its  expira- 
tion. The  deeper  and  more  intricate  problem  of  the 
average  risks  of  average  lives,  the  course  of  a  gener- 
ation of  men  succumbing  to  disease  and  thinning 
out  as  the  years  proceed  until  the  last  old  patriarch 
is  in  his  grave,  would  not  call  for  solution. 

But  the  life  insurance  company  must  provide  in  its 
calculations  not  onty  for  the  inevitable  increase  of 
cost  because  of  increasing  age,  but  also  for  the 
change  from  healthy  conditions  proven  by  exami- 
nation to  the  average  condition  of  mankind.  While 
the  matter  is  not  yet  considered  definitely  settled,  the 
actuaries  have  brought  forward  figures  to  show  that 
the  benefit  of  selection  is  lost  in  about  five  years;  or, 
in  other  words,  that  in  five  jears  the  men  this  year 
admitted  into  the  company  after  strict  examinations 
will  not  be  better  risks  than  the  average  of  men  at 
their  then  ages.  In  any  case  it  is  certain  that,  aside 
from  discrimination  because  of  ancestry,  the  benefit 
of  selection  is  very  soon  lost;  and  therefore  is  it  that 
no  company  dares  base  its  calculations  on  the  assump- 
tion that  it  will  have  a  better  experience  than  the 
ordinary.  It  would  not  do  for  a  company  to  base  its 
rate  for  ten  years  hence  for  a  policj^  taken  at  age  40 


10 

upon  its  present  experience  on  new  policies  taken  out 
at  age  50. 

In  short,  insurance  companies  must  expect  a  death 
rate  approximating  the  average  death  rate  of  a 
similar  lot  of  people  taken  at  random  from  the  popu- 
lation. If  there  be  any  gain  after  the  bloom  of  fresh 
selection  is  over,  it  v^ill  be  because  of  freedom  from 
hereditary  taint  or  tendency  to  disease.  But  such 
companies  must  not  make  their  calculations  upon 
statistics  materially  more  favorable  than  the  general 
mortuary  experience  of  the  country. 

In  order  then  to  insure  a  single  person  for  his  whole 
life,  whether  on  level  premium,  limited  payment  or 
natural  premium  plan,  it  is  necessary  for  a  company 
to  fix  in  advance  the  rate  for  each  succeeding  j^ear; 
and,  to  accomplish  that,  the  company  must  have 
accurate  information  as  to  the  hazard  at  each  succeed- 
ing age  until  the  ultimate  limit  of  life.  To  obtain 
such  information  tables  must  be  made  from  statistics 
covering  a  very  large  number  of  lives.  These  tables 
will  show  the  actual  percentage  of  hazard  at  each 
succeeding  age;  or,  if  more  convenient  for  the  calcula- 
tion, v^ill  show  the  actual  cost,  had  each  life  been 
insured.  A  year's  statistics  of  the  mortality  of  this 
nation  would  exhibit  all  ages  and  would  enable  one 
to  construct  a  table  showing  in  what  order  the  lives 
of  a  generation  now  setting  out  would  fail.  The 
gathering  and  classification  of  such  statistics  are  no 
light  undertaking  even  now  in  this  age  of  statistics. 
In  the  infancy  of  life  insurance,  the  undertaking  was 
indeed  an  heroic  one. 

August  Meitzer  in  his  excellent  work  on  ''The 
History,  Theory  and  Technique  of  Statistics  "  gives  a 


11 

full  though  concise  account  of  the  genesis  of  mortality 
tables.  The  baptismal  and  death  records,  begun  to 
be  kept  in  London  about  the  beginning  of  the  seven- 
teenth century,  served  as  the  basis  for  the  first  calcu- 
lations made  by  John  Graunt  in  1662.  Meitzer  says: 
* 'He  calculates  that  of  100  persons  born,  36  die  in  the 
next  6  years,  24  in  the  next  decade,  15  in  that  follow- 
ing, and  then  9,  0,  5,  4,  2  and  1."  This  would  place 
the  ultimate  limit  of  life  at  86,  considerably  below 
the  age  now  used  in  any  table. 

More  complete  tables  were  constructed  by  Edmund 
Halley,  in  1693,  from  the  statistics  of  the  city  of 
Breslau.  This  work  also  comprised  what  the  author 
called  *'  an  attempt  to  ascertain  the  price  of  annuities 
on  lives."  He  calculated  approximately  the  average 
expectation  of  life  at  each  age;  for  the  * 'expectation" 
was  originally  the  basis  for  premium  computations. 
Insurance  of  lives  from  the  dangers  of  distant  and 
hazardous  journeys  and  voyages  was  already  well 
known.  Some  men,  more  daring  than  others,  had 
also  undertaken  to  insure  lives  for  the  term  of  life. 
Premiums  were  crudely  constructed  from  the  premise: 
''He's  good  for  ten  jxars  yet,"  orthe  like.  ^"Expecta- 
tion" was  regarded  the  matter  of  prirhe  importance  J 

In  1742,  after  several  life  insurance  companies  haa 
already  begun  operations,  Johann  Peter  Siissmilch 
gathered  together  in  a  comprehensive  review  all  the 
valuable  vital  statistics  then  available.  At  the 
initiative  of  the  philosopher  Menander,  Sweden  the 
preceding  year  had  begun  the  registration  of  births, 
marriages  and  deaths,  thus  becoming  the  pioneer  in 
national  statistics  of  that  sort.  In  1765  the  Equi- 
table Life  Insurance  Institution  was  founded  at  Lon- 


don,  the  first  to  operate  on  the  mutual  or  participa- 
ting principle.  During  all  this  time,  and  in  fact  until 
after  the  beginning  of  the  present  century,  the  com- 
panies made  their  rates  from  the  fragmentary  data 
furnished  by  Siissmilch.  Wide  differences  therefore 
occured  in  the  rates  of  the  companies,  even  where 
intelligent  management  prevailed.  Elsewhere  the 
fatuity  which  again  presented  itself  a  few  years  ago 
in  assessment  concerns,  and  is  even  now  prevalent  in 
endowment  bond  swindles,  led  scores  of  institutions 
into  bankruptcy. 

To  avoid  such  perils,  it  was  found  necessary  to 
obtain  definite  statistics  showing  what  the  average 
death  rate  is  at  each  age,  so  that,  when  one  under- 
took an  insurance  upon  a  life,  it  could  be  demon- 
strated whether  the  present  resources  and  future 
premiums  balanced  the  risk.  For  this  purpose,  about 
1815,  Milne  tabulated  the  mortality  of  Carlisle  city 
from  1779  to  1787  and  from  it  framed  the  ''Carhsle 
Tables,"  which  became  very  popular.  The  "Actuaries' 
or  Combined  Experience  Tables"  w^ere  at  a  later  date 
deduced  from  the  experience  of  seventeen  English 
companies  and  in  most  quarters  supplanted  the  Car- 
lisle. "The  American  Experience  Tables"  are  the 
w^ork  of  Shephard  Homans,  then  the  actuary  of  the 
Mutual  Life  Insurance  Company  of  New  York,  and 
were  deduced  from  the  experience  of  that  company. 
These  two  latter  tables  have  been  made  authoritative 
in  this  country.  Nearly  all  the  States  employ  the 
actuaries'  tables;  the  State  of  New  York  uses  the 
American.  In  England  the  "Carlisle  Tables"  still 
divide  the  honors  with  the  "Combined  Experience." 

There  is  no  very  great  variance  between  the  three. 


13 

The  widest  difference  arises  from  the  placing  of  the 
ultimate  limit  of  life  at  age  95  in  the  American  tables; 
the  other  tables  place  the  limit  at  age  100.  This  is 
really  arbitrary,  however,  and  by  no  means  signifies 
that  the  limit  of  life  in  America  is  lower  than  in 
England.  The  figures  given  at  the  older  ages — from 
75  on— are  in  all  tables  rather  the  result  of  logic  than 
calculation.  Complete  and  full  statistics  at  those 
ages  are  wanting;  and  the  best  that  the  actuaries 
have  yet  been  able  to  do  is  to  arrive  at  such  figures 
in  the  tables  by  an  abstruse  geometrical  calculation, 
w^orkingfrom  what  is  known  as  the  curve  ofmortality, 
the  sweep  and  direction  of  which  is  easily  demon- 
strated by  the  facts  known  concerning  mortality  at 
younger  ages.  The  ultimate  or  extreme  limit  of  life, 
taken  together  with  the  sweep  of  this  curve,  deter- 
mines the  speed  or  slowness  with  which  the  remain- 
ing lives  fail. 

The  experiences  of  nearly  all  the  American  com- 
panies were  combined  a  few  years  ago  to  form  -a  new 
set  of  tables,  one  for  male  lives  and  one  for  female. 
Various  statistics  dealing  with  mortality  by  States 
and  even  counties,  and  also  v^ith  the  various  causes 
of  death,  w^ere  carefully  collated.  Only  a  small  part 
of  the  information  thus  brought  to  light  has  as  jet 
been  utilized;  the  classification  of  hazards  is  yet  in  its 
infancy,  despite  the  clearest  demonstration  of  the 
differences  caused  by  sex,  locality  and  heredity.  The 
analysis  of  the  statistics  of  female  risks  showed  that 
a  higher  death-rate  was  to  be  expected  from  age  20 
to  age  40  than  among  male  lives,  and  a  much  lower 
death  rate  from  age  40  to  age  65.  This  indicated 
that  a  special  rate  and  a  special  reserve  should  be 


14 

made  for  female  lives.  This  has  not  been  done. 
Some  companies  charge  women  $3  or  $5  per  $1,000 
more  than  men  up  to  age  45;  others  charge  both  sexes 
tl;ie  same.  But  none  charges  less  after  age  40  and 
none  has  attempted  to  construct  scientifically  ad- 
justed rates  for  female  lives,  although  Mr.  Meech, 
who  compiled  the  statistics  referred  to,  has  made  it 
easy  to  make  the  adjustment.  The  same  is  true 
concerning  each  and  every  other  item  in  this  valuable 
compilation.  In  example,  the  more  conservative 
companies  limit  their  operations  to  States  in  which 
the  mortality  v^as  found  favorable;  the  others  write 
freely,  making  a  distinction,  if  any,  in  dividends  only. 
Nothing  approaching  scientific  discrimination  in 
rates  has  been  tried,  even  in  the  matter  of  lives  in  the 
Arkansas  swamps,  where  an  old  person  is  rarely  seen. 
Doubtless  many  of  the  companies  were  deterred 
from  making  any  discrimination  in  rates  by  the  fact 
that  all  the  States  were  rapidly  coming  to  imitate 
Massachusets  in  adopting  the  arbitrary  standard  of 
the  actuaries'  tables  for  estimating  reserve  liabilities. 
The  honored  actuary,  Elizur  Wright,  who  had  urged 
the  adoption  of  this  standard,  considered  it  by  no 
means  a  final  one,  but,  instead,  only  the  most  reliable 
then  at  hand.  It  was  in  no  sense  his  purpose  to 
make  companies  technically  insolvent  which  were  not 
genuinely  insolvent;  and  far  less  ^was  it  in  is  mind  to 
prevent  companies  from  making  a  rate  commensu- 
rate with  the  actual  hazard.  He  was  on  the  outlook 
for  definite  information  relating  to  the  mortality 
experience  of  American  companies,  and  he  expected 
American  companies  to  conform  their  rates  to  Amer- 
ican experience.    In  his  report  of  1864  to  the  Massa- 


15 

chusetts  legislature,  Mr.  Wright  gives  the  compar- 
ative experience  of  American  companies  as  reported 
to  him,  and  in  commenting  upon  the  figures  he  says: 
**It  seems  to  us,  after  a  careful  consideration  of  the 
experience  of  the  companies  which  we  have  observed 
for  the  last  five  years,  as  well  as  that  of  several  of  the 
larger  American  companies  prior  to  that  time,  that 
premiums  might  be  considerably  reduced  with  safety 
on  policies  not  extending  beyond  the  age  of  70." 

In  his  report  of  the  following  year,  Mr.  Wright 
gave  a  further  illustration  of  the  favorable  experience 
of  American  companies  and  said:  *'0f  course  this 
favorable  difference  of  experience  cannot  be  perma- 
nently held  by  companies  whose  business  is  chiefly 
whole-life  policies;  for  if  the  death  rate  is  slower  on  the 
earlier  ages,  it  must  be  faster  on  the  later,  the  limit 
of  human  life  being  pretty  certainly  fixed." 

Mr.  Wright  clearly  had  no  intention  of  creating 
hard  and  fast  lines  which  should  fix  once  for  all  the 
rates  to  be  charged  for  life  insurance;  and  the  State 
supervision  which  refuses  to  take  into  the  account 
more  recent  statistics  resembles  what  Elizur  Wright 
did  about  as  Pharasaism  resembled  the  religion  of 
Job.  At  the  same  time,  Mr.  Wright  was  at  one  with 
the  others  in  the  idea  that  ^'  the  limit  of  human  life  is 
pretty  certainly  fixed."  In  consequence  of  that,  to 
his  view,  later  mortality  almost  balances  present 
saving;  the  fewer  deaths  now,  the  more  hereafter  and 
before  the  limit  fixed  in  our  calculations.  Such  a  view 
seems  natural,  but  is  nevertheless  fallacious;  for  the 
same  vitality  which  means  longer  lives  in  the  aggre- 
gate means  a  longer  life  to  the  oldest  survivor  as  well. 
The  two  are  but  different  expressions  of  the  same 


16 

fundamental  fact,  the  superior  vital  energy  of  the 
race;  and  the  existence  of  one  necessarily  implies  the 
other.  The  gain  in  mortality  is  therefore  an  absolute 
gain,  not  to  be  neutralized  by  an  augmented  death 
rate  beyond  70. 

This  statement  does  not  rest  upon  logic  alone^  but 
is  supported  b3^  facts.  The  mortality  of  the  Presby- 
terian Ministers'  Fund,  the  oldest  American  company, 
shows  a  heavy  saving  over  the  actuaries'  tables, 
which  saving  is  quite  as  apparent  at  older  as 
at  younger  ages.  This  is  not  an  exceptional  case 
in  this  regard,  for  the  New  England,  the  Mutual  Benefit 
and  the  Connecticut  Mutual,  all  of  which  are  old 
companies  and  have  done  a  whole-life  business  prin- 
cipally, now  make  heavy  gains  from  mortality  each 
year. 

Reports  of  longevity  beyond  the  limit  set  by  the 
tables  have  been  frequent  and  in  many  cases  abso- 
lutely indisputable.  It  would  almost  be  safe  to  say 
that  the  facts  justify  puttingthe  limit  at  110,  or  pos- 
sibly 120  instead  of  C5  or  100. 

The  fact  that  the  tables  compiled  by  Mr  Meech 
followed  the  old  assumption  as  to  the  limit  of  life 
probably  had  not  a  little  to  do  with  their  want  of 
influence  upon  the  practice  of  companies.  The  varia- 
tion from  the  actuaries'  and  American  experience 
tables  did  not  seem  wide  enough  to  render  the  use  of  the 
old  tables  ridiculous;  and  so  long  as  the  old  tables 
continued  the  arbitrary  standards  of  State  depart- 
ments, the  companies  could  not  well  undertake  any 
serious  departure  in  rates.  One  company  did  under- 
take, not  a  discriminating  adjustment,  but  a  general 
reduction  of  rates  to  accord  with  its  actual  experience. 


17 


The  arbitrary  tests  of  the  old  tables  soon  made  its 
surplus  seem  pitiably  small  and  even  threatened  to 
wipe  out  that  margin  in  time.  So  the  attempt  was 
given  over  after  a  somewhat  stubborn  struggle,  and 
a  return  to  the  old  standards  w^as  inaugurated 

In  consequence  of  these  things,  the  actuaries'  and 
American  tables,  though  known  to  be  too  unfavorable 
and  also  to  be  opposed  to  proper  classification  of 
hazards,  yet  remain  the  standards  both  for  govern- 
mental examinations  of  life  insurance  companies  and 
for  the  making  of  rates  and  dividend  calculations  and 
adjustments  within  the  companies  themselves. 

Since  the  actuaries'  tables  are  standard  in  nearly 
every  State,  they  will  be  referred  to  hereafter  in  the 
illustrations  given  in  this  work.  The  tables  are  here 
given,  together  with  the  rate  per  cent  of  mortality 
and  the  expectation  of  life  at  each  age  from  10  to 
100. 


ACTUARIES 

'  TABLE 

OF  MORTALITY. 

Number 

Deaths 

Per  cent,  of 

Expecta- 

AGE. 

living. 

each  year. 

deaths  to 
the  living. 

tion  of 
life. 

10 

100,000 

676 

.006760 

48.36 

11 

99,324 

674 

.006786 

47.68 

12 

98,650 

672 

.006812 

47.01 

13 

97,978 

671 

.006848 

46.33 

14 

97,307 

671 

.006896 

45.64 

15 

96,636 

671 

.006944 

44.96 

16 

95,965 

672 

.007003 

44.27 

17 

95,293 

673 

.007062 

43.58 

18 

94,620 

675 

.007134 

42.88 

19 

93,945 

677 

.007206 

42.19 

18 


Actuaries'  Table  of  Mortality.— Continued. 


Nnmber 

Deaths 

Per  cent,  of 

Expecta- 

AGE. 

living. 

each  year. 

deaths  to 
the  living. 

tion  of 
life. 

20 

93,268 

680 

.007291 

41.49 

21 

92,588 

683 

.007377 

40.79 

22 

91,905 

686 

.007464 

40.09 

23 

91,219 

690 

.007564 

39.39 

24 

90,529 

694 

.007666 

38.68 

25 

89,835 

698 

.007770 

37.98 

26 

89,137 

703 

.007887 

37.27 

27 

88,434 

708 

.008006 

36.56 

28 

87,726 

714 

.008139 

35.86 

29 

87,012 

720 

.008275 

35.15  ,/ 

30 

86,292 

727 

.008425 

34.43  ^ 

31 

85,565 

734 

.008578 

33.72 

32 

84,831 

742 

.008747 

33.01 

33 

84,089 

750 

.008919 

32.30 

34 

83,339 

758 

.009095 

31.58 

35 

82,581 

767 

.009288 

30.87 

36 

81,814 

776 

.009485 

30.15 

37 

81,038 

785 

.009687 

29.44 

38 

80,253 

795 

.009906 

28.72 

39 

79,458 

805 

.010131 

28.00 

40 

78,653 

815 

.010362 

27.28 

41 

77,838 

826 

.010612 

26.56 

42 

77,012 

839 

.010894 

25.84 

43 

76,173 

857 

.011251 

25.12 

44 

75,316 

881 

.011697 

24.40 

45 

74,435 

909 

.012212 

23.69 

46 

73,526 

944 

.012839 

22.97 

47 

72,582 

981 

.013517 

22.27 

48 

71,601 

1,021 

.014260 

21.56 

49 

70,580 

1,063 

.015061 

20.87 

50 

69,517 

1,108 

.015939 

20.18 

51 

68,409 

1,156 

-016898 

19.50 

H 


h 


19 


Actuaries'  Table  of  Mortality. — Continued. 


Number 

Deaths 

Per  cent,  of 

Expecta- 

AGE. 

Hving. 

each  year. 

deaths  to 
the  living. 

tion  of 
life. 

52 

67,253 

1,207 

.017947 

i   18.82 

53 

66,046 

1,261 

.019093 

18.16 

54 

64,785 

1,316 

.020313 

17.50 

55 

63,469 

1,375 

.021664 

16.86 

56 

62,094 

1,436 

.023126 

16.22 

57 

60,658 

1,497 

.024679 

15.59 

58 

59,161 

1,561 

.026386 

14.97 

59 

57,600 

1,627 

.028247 

14.37 

60 

55,973 

1,698 

.030336 

13.77 

61 

54,275 

1,770 

.032612 

13.18 

62 

52,505 

1,844 

.035120 

12.61 

63 

50,661 

1,917 

.037840 

12.05 

64 

48,744 

1,990 

.040826 

11.51 

65 

46,754 

2,061 

.044082 

10.97 

66 

44,693 

2,128 

.047614 

10.46 

67 

42,565 

2,191 

.051474 

9.96 

68 

40,374 

2,246 

.055630 

9.47 

69 

38,128 

2,291 

.060087 

9.00  ^ 

70 

35,837 

2,327 

.064933 

8.54  "^ 

71 

33,510 

2,351 

.070158 

8.10 

72 

31,159 

2,362 

.075805 

7.67 

73 

28,797 

2,358 

.081884 

7,26 

74 

26,439 

2,339 

.088468 

6.86 

75 

24,100 

2,303 

.095560 

6.48 

76 

21,797 

2,249 

.103179 

6.11 

77 

19,548 

2,179 

.111469 

5.76 

78 

17,369 

2,092 

.120444 

5.42 

79 

15,277 

1.987 

.130065 

5.09 

80 

13,290 

1,866 

.140406 

4.78 

81 

11,424 

1,730 

.151436 

4.48 

82 

9,694 

1,582 

.163194 

4.18 

83  I 

8,112 

1,427 

.175912 

3.90 

6  5. 


1'/^ 


20 


Actuaries'  Table  of  Mortality.— Concluded. 


Number 

Deaths 

Per  cent,  of 

Expecta- 

AGE. 

living. 

each  year. 

deaths  to 
the  living. 

tion  of 
life. 

84 

6,685 

1,268 

.189678 

3.63 

85 

5,417 

1,111 

.205095 

3.36 

86 

4,306 

958 

.222480 

3.10 

87 

3,348 

811 

.242234 

2.84 

88 

2,537 

673 

.265274 

2.59 

89 

1,864 

545 

.292382 

2.35 

90 

1,319 

427 

.323730 

2.11 

91 

892 

322 

.360987 

1.89 

92 

570 

231 

.405263 

1.67 

93 

339 

155 

.457227 

1.47 

94 

184 

99 

.516304 

1.28 

95 

89 

52 

.584270 

1.12 

96 

37 

24 

648640 

.99 

97 

13 

9 

.692308 

.89 

98 

4 

3 

.750000 

.75 

99 

1 

1 

1.000000 

.50 

21 


RATEMAKING— TERM  AND  NATURAL 
PREMIUM. 

The  simplest  method  of  apportioning  the  contribu- 
tions for  life  insurance  is  the  annual  renewable  term 
or  natural  premium  plan.  This  plan  provides  for 
rates  increasing  as  the  insured's  age  increases,  each 
year  taking  care  of  itself. 

To  ascertain  the  net  rate  at  any  age  for  $1,000  in- 
surance, assume  that  you  have  insured  the  numbe? 
living  at  that  age  according  to  the  tables.  Then  by 
reference  to  the  tables  at  that  age  you  will  find  the 
number  dying;  that  number  multiplied  by  $1,000, 
slip.ws  the  total  expected  loss  for  the  year.  All  actu- 
aries assume  that  these  losses  are  to  be  paid  at  the 
close  of  the  yesiv ;  hence  to  ascertain  what  should  be 
collected  at  the  beginning  of  the  year  to  cover  them 
the  amount  should  be  discounted  at  4  per  cent  simple 
discount.  As  that  sum  is  what  the  whole  number 
living  at  the  age  named  should  pay,  it  is  only  neces- 
sary to  divide  it  by  the  number  living  to  find  what 
each  should  pay.  The  quotient  is  the  net  natural 
premium  of  that  age. 

At  the  close  of  that  one  year  the  insured  renews  if 
at  all  at  the  premium  for  one  year's  assurance  at  the 
next  higher  age.  And  so  on,  indefinitely,  the  cost 
finalh^  becoming  prohibitory. 

Doubtless,  if  mortality  tables  of  a  complete  and  ac- 
curate character  had  preceded  the  assuring  lives  in 
point  of  time, the  natural  premium  tables  would  have 
been  early  discovered.    But  mortality  tables  only 


22 

came  into  existence  in  answer  to  a  call  by  actuaries 
for  safer  and  fuller  data  from  which  to  work  on 
plans  covering  the  whole  period  of  life  in  insurance 
and  annuities.  These  plans  were  already  in  existence 
and  high  in  popular  favor.  Scientific  exploitation  of 
statistics  is  supposed  to  set  forth  the  simpler  deriva- 
tions first;  but  the  practical  business  world  often 
adopts  the  complex  before  science  has  examined  the 
data  at  all. 

Natural  premium  insurance,  therefore,  while  by  far 
the  simplest  form,  came  latest  into  the  arena,  rather 
tardily  endeavoring  to  satisfy  the  public's  demand 
for  pure  insurance  at  a  low  price.  The  popular  de- 
sire had  voiced  itself  in  a  swarm  of  hastily  organ- 
ized and  improperly  managed  associations  and  or- 
ders before  actuaries  and  managers  could  be  made 
to  see  that  it  was  possible  to  sell  life  insurance  from 
year  to  year  at  its  current  value.  Even  now  the 
lesson  is  but  half  learned,  and  the  term  natural  pre- 
mium is  used  to  cover  a  multitude  of  frauds  and 
thefts,  simply  because  it  is  yet  a  mystery  t^  many. 

A  very  large  proportion  of  the  worlc^s  insurance 
will  alw^ays  be  of  the  character  known*  as  *'  tempo- . 
rary,"  that  is,  will  be  intended  only  to  cover  for  a 
limited ,  even  if  indefinite,  period  of  time.  Regular  com- ' 
■'panics  have  been  more  or  less  averse  Jo  undertaking 
to  supply  this  want,  because  among  actuaries  it  was 
a  grave  question  whether  there  was  not  so  great  an 
opening  for  adverse  selections,  or  the  departure  of 
healthy  lives,  that  no  company  could  hold  up  under 
it.  Therefore,  except  when  united  with  a  heavy  in- 
vestment, thus  affording  something  to  be  forfeited 
in  event  of  discontinuance,  the  regular  companies 


23 

were  for  a  long  time  unwilling  to  make  a  practice  of 
issuing  renewable  term  policies. 

Only  during  the  last  decade  has  this  form  of  insur- 
ance been  popularized,  largely  through  the  deter- 
mined efforts  of  SheppardHomans, the  renowned  Nes- 
tor of  American  actuaries.  For  the  purpose  of  push- 
ing this  cheap  and  useful  form  of  insurance  before  the 
public,  Mr.  Homans  caused  the  organization  of  a 
new  company  and  devoted  the  later  and  maturer 
years  of  his  life  to  advancing  the  cause  of  natural 
premium  insurance. 

In  the  construction  of  rates  Mr.  Homans  made  an 
addition  of  one- third  to  the  net  rates  to  form  a 
special  reserve  or  guarantee  fund.  To  the  whole  rate 
thus  made  up  he  added  just  $4  per  $1,000  insurance 
for  expenses.  The  addition  of  the  percentage  for  a 
guarantee  fund  seems  to  have  been  for  the  purpose  of 
preventing  adverse  selection  during  the  earlier  years. 
It  was  Mr.  Homans'  original  idea  to  distribute  this 
fund  to  reduce  the  premiums  after  ten  years.  This 
plan  has  since  been  almost  abandoned  however;  and 
so  much  as  is  necessary  to  keep  the  rate  level  at  the 
age  of  entry  is  used  each  year  for  that  purpose,  the 
remainder  being  carried  forward  with  interest.  The 
original  intention,  therefore,  was  to  have  the  cost 
advance  gradually  as  the  actual  hazard  increased; 
but  now  the  rate  is  kept  level  as  long  as  possible  and 
then  the  rate  recoils  to  a  high  figure  when  the  artifi- 
cial reduction  ceases  for  want  of  funds.  This  is  prac- 
tically a  surrender  of  the  principles  of  natural  premium 
insurance,  and  an  imitation  of  level  premium. 

The  rates  for  terms  longer  than  one  year  are  made 
in  the  same  manner  as  rates  for  one  year's  insurance. 


24 

For  instance,  if  a  person  were  set  to  construct  a  pre- 
mium to  be  paid  in  advance  in  one  sum  for  term  in-" 
surance  for  two  years,  lie  would  discount  the  sum  of 
the  losses  for  the  first  year  at  4  per  cent  simple  dis- 
count for  one  year,  and  the  sum  of  the  losses  for  the 
second  year  at  4  percent  compound  discount  for  two 
3^ears.  These  sums  he  would  add  together  and  divide 
the  total  by  the  number  living  at  the  beginning 
of  the  year.  The  quotient  would  be  the  single 
premium  for  term  insurance  for  two  years  at  the^e 
specified.  ^ 

If  a  single  premium  for  three  years  insurance  were- 
required,  it  would  only  be  necessary  to  add  to  the 
sum  of  the  discounted  losses  of  the  first  and  second 
years  the  present  value  of  the  losses  of  the  third  year, 
calculated  at  4  per  cent  compound  discount  for  three" 
years.  Then  divide  by  the  number  living  at  the  orig- 
inal age  as  before.  A  similar  process  will  reduce  the 
net  single  premiums  at  every  age  and  for  any  term  of 
years. 

The  single  premium  of  a  one-year  term  policy  is 
the  annual  premium  for  a  natural  premium  policy  for 
the  current  year. 

^  But  where  a  level  annual  premium  is  required  the 
'Case  is  somewhat  different.  In  that  cape  the  first  and 
subsequent  annual  premiums  must  be  equivalent  to 
the  net  single  premium  for  the  same  term.  To  ascer- 
tain what^annual  premium  will  be  equivalent  to  the 
single  premium,  it  is  first  necessary  to  find  out  what 
is  the  present  or  discounted  value  of  one  dollar  in 
hand  and  one  dollar  promised  to  be  paid  annually 
during  the  term  if  the  insured  is  living.  In  other 
words,  the  promise  of  the  insured  to  pay  a  dollar 


25 

each  year  must  be  dealt  with  as  an  annuity  upon  his 
life,  but  in  the  company's  favor. 

To  ascertain  the  present  value  of  one  dollar  a  year 
from  now,  the  payment  conditioned  upon  the  in- 
sured now  at  a  certain  age  then  being  alive,,  it  is  first 
necessary  to  discount  the  dollar  at  4  per  cent  simple 
discount,  and  then  to  multiply  the  same  by  the  frac-  "^ 
tion  formed  by  dividing  the  number  living  at  the  end 
of  the  year  by  the  number  living  at  the  beginning. 
That  fraction  represents  the  probability  of  one's  be- 
ing yet  alive  to  pay  at  the  close  of  the  year ;  and  the 
result  of  multiplying  the  present  value  of  one  dollar 
by  it  is  to  find  the  present  value  of  the  dollar  subject 
to  the  contingency  of  death  during  the  year.  This 
sum  added  to  the  one  dollar  to  be  •  paid  in  advance 
the  first  year  gives  the  total  present  value  of  a  prom- 
ise to  pay  a  dollar  annually  in  advance  for  two  A^ears 
if  living. 

If  the  present  value  of  an  annual  premium  of  one 
dollar  for  two  years  be  ascertained,  then  to  ascertain 
the  number  of  dollars  in  an  annual  premium  equal  in 
value  to  the  single  premium  for  term  insurance  for 
two  years,  divide  the  single  premium  by  the  present 
value  of  the  annuity  of  one  dollar.  The  quotient  will  ^ 
be  the  annual  premium  corresponding  to  the  single 
premium. 

If  the  annual  premium  for  a  three-year  term  were 
required,  it  would  only  be  necessary  to  add  to  the 
present  value  of  an  annuity  of  one  dollar  for  two 
years  the  present  value  of  a  third  dollar  to  be  paid  at 
the  beginning  of  the  third  year,  conditioned  upon 
surviving  the  first  and  second  3^ears.  To  find  that 
value  multiply  the  present  value  of  one  dollar  at  4  per 


26 

cent  compound  discount  for  two  years  by  the  frac- 
tion formed  by  dividing  the  number  living  at  the  be- 
ginning of  the  third  year  by  the  number  living  at  the 
beginning  of  the  first  year,  according  to  the  tables, 
This  fraction  represents  the  probability  of  surviving 
until  the  beginning  of  the  third  year  and  the  result  of 
the  multiplication  expresses  the  present  value  of  one 
dollar  payable  two  years  hence  if  living.  Adding 
this  value  to  the  pr-esent  value  of  a  two-year  annuity 
of  one  dollar  already  ascertained,  the  present  value 
of  a  three-year  annuity  of  one  dollar  is  found.  By 
dividing  the  net  single  premium  for  three  years'  term 
insurance  by  the  present  value  of  an  annuity  of  one 
dollar  for  three  years,  the  number  of  dollars  neces- 
sary to  be  paid  annually  to  equal  the  single  premium 
or,  in  other  words,  the  corresponding  annual  pre- 
mium, is  arrived  at. 

A  continuation  and  elaboration  of  this  process  will 
yield  the  net  annual  premium  at  any  age  for  term  in- 
surance for  any  number  of  years. 

The  loading  or  margin  for  expenses  and  contingen- 
cies on  the  annual  renewable  term  or  natural  pre- 
mium rates  is  commonly  $4.00  per  $1,000  insurance 
in  addition  to  the  thirty-three  and  a  third  percent  of 
the  net  premium  added  thereto  to  form  a  special  re- 
serve fund. 

The  loading  on  single-premium  term  policies,  and 
on  annual-premium  term  policies  as  well,  is  com- 
monly thirty-three  and  a  third  per  cent  of  the  net 
premium. 


27 


RATEMAKING— WHOLE  LIFE. 

Death  is  not  a  mere  chance,  but,  on  the  contrary, 
the  most  certain  of  human  events.  In  the  nature  of 
things,  it  would  be  folly  to  bet  against  its  occurrence 
without  hedging;  and  therein  consists  the  fatuity  of 
assessmentism.  Any  insurance  intended  to  cover  the 
whole  period  of  life  must  be  calculated  on  the  basis 
of  paying  a  certain  claim. 

If  a  pool  were  formed  and  it  were  gravely  proposed 
to  put  in  money  enough  to  leave  each  member's  widow 
one  thousand  dollars  at  his  death,  the  deposit  re- 
quired from  each  one  would  be  easily  estimated,  and 
would  be  the  same  regardless  of  the  then  ages.  It 
requires  one  thousand  dollars  to  create  an  estate  of 
one  thousand  dollars;  if  none  were  to  pay  more  than 
that,  none  could  pay  less. 

The  onh^  modification  arises  from  the  fact  that, 
while  death  is  certain,  the  time  of  its  occurrence  is 
very  uncertain.  Even  that  would  make  no  difference 
in  the  proposed  deposits  if  it  were  not  for  the  fact  of 
interest.  The  possibility  of  earning  interest  upon 
such  deposits,  until  they  are  gradually  paid  out  in 
death-claims,  puts  a  new  face  on  the  aifair. 

Then  the  element  of  time  assumes  importance  and 
It  is  necessary  to  endeavor  to  discover  at  what 
time  at  the  earliest  the  various  payments  would  be 
required  because  of  death.  For  this  purpose  were  " 
carefully  constructed  and  conservative  mortality 
tables  found  requisite.    For  mere  term  insurance  much 


28 

more  crude  and  careless  estimates  would  have  an- 
swered. But  where  certain  loss  stares  one  in  the  face, 
not  to  be  escaped  and  for  which  one  must  without 
fail  prepare,  it  is  essential  to  know  when  it  is  to  be 
expected.    Forewarned  is  forearmed. 

Suppose,  therefore,  that,  armed  with  mortality  ta- 
bles, a  man  was  set  to  calculate:  \  (1)  When  the 
amounts  of  the  insurance  on  the  lives  of  1,319  persons 
now  aged  90  would  have  to  be  paid;  (2)  what  gross 
amount  he  would  need  to  have  in  hand  now  to  meet 
such  payments  as  they  fall  due,  assuming  that  he 
could  earn  4  per  cent,  on  sums  in  his  hands^  (3)  what 
sum  each  of  the  1,319  would  have  to  pay  in  as  a 
single  premium  to  make  up  the  necessary  fund;  (4) 
what  is  the  present  value  of  one  dollar  in  hand  plus  a 
promivSe  of  a  man  now  90  to  pay  one  dollar  each  year 
until  his  death;  (5)  what  annual  premium  in  advance 
is  equivalent  to  the  single  premium  at  age  90. 

Referring  to  the  actuaries'  tables  it  is  found  that 
the  1,319  living  at  age  90  die  in  the  following  order: 
The  first  year      427      The  sixth  year         52 
''     second'*       322  ''seventh'*  24 

"     third     "       231  "  eighth     "  9 

"     fourth   "       155  ''  ninth       "  3 

"     fifth       "  95  "  tenth       "  1 

Therefore  if  each  be  insured  for  $1,000,  payable  at 
the  close  of  the  year  in  which  he  died,  the  insurance 
would  have  to  be  paid— $427,000  in  one  year,  etc., 
ending  with  $1,000  in  ten  years. 

If  a  man  owe  $1,000,  due  in  one  year,  and  money 
will  earn  4  per  cent.,  he  holds  the  equivalent  of  his 
debt  when  he  possesses  $1,000,  discounted  at  4  per 
cent.,  or  about  $961.54.   Therefore,  if  he  owes  $427,- 


29 

000  due  in  one  year,  he  should  possess  427x$961.54^ 
in  order  to  be  solvent  at  the  present  moment.  The 
equivalent  of  $1,000  due  in  two  years,  reckoning  in- 
terest at  4  per  cent.,  is  about  $924.56;  therefore  the 
amount  required  to  be  in  hand  to  pay  $322,000  of 
losses  the  second  year  is  322 x  $924.56.  In  the  same 
way  all  the  death  claims  can  be  discounted  and  cal- 
culated at  their  present  values.  The  sum  of  such 
present  values  is  $1,192,897.65  and  constitutes  the 
gross  present  fund  which  will  enable  him  to  meet  all 
mortuary  claims  as  the  same  fall  due. 

If  it  is  the  intent  that  these  1,319  old  men  shall  de- 
posit each  the  same  amount,  the  whole  to  be  suffi- 
cient to  pay  the  family  of  each  $1,000  at  his  death,  it 
will  be  necessary  for  each  to  deposit  l-1319th  part  of 
$1,192,897.65,  or  about  $904.40.  This  amount, 
therefore,  is  the  net  single  premium  at  age  90. 

If  these  1,319  men  are  to  pay  each  his  quota  in 
equal  annual  payments  so  long  as  he  lives,  it  is  evi- 
dent that  the  number  paying  will  each  year  be  de- 
creased by  the  number  dying  during  the  previous 
year.  For  instance,  if  each  were  to  pay  $1.00  at  the 
beginning  of  each  year  during  life,  $1,319.00  would 
be  received  the  first  year.  But  before  the  second  pay- 
ment would  fall  due,  427  would  be  dead,  and  only 
l,319less  427,or892,would  remain  to  meetpayments. 
The  amount  collected,  therefore,  would  be  but  $892, 
which  being  discounted  at  4  per  cent,  is  equivalent  to 
$857.69  in  hand.  The  equivalents  of  the  amounts 
which  the  payments  each  succeeding  year  will  yield 
is  determined  in  the  same  manner;  and  when 
these  are  added  to  the  $1,319  in  hand  the 
immediate      value     oi     the     promises     of     1,319 


30 

men  aged  90  to  pay  $1.00  each  annually  in  ad- 
vance is  obtained.  The  value  of  such  promises  is 
about  $3,278.24;  and  expressed  in  fractions  the  aver- 
age value  of  each  man's  promise  or  in  other  words  of 
a  life  annuity  at  age  90  is  $2.485398. 

If  the  present  v^orth  of  the  1,319  men's  promises  to 
pay  $1.00  annually  in  advance  throughout  their  lives 
is  $3,278.24  and  the  immediate  fund  necessary  to 
pay  the  estate  of  each  $1,000  at  his  death  is  $1,192,- 
897.65,  it  is  evident  that  the  annual  premium 
charged  these  men  must  be  as  many  times  $1.00  as 
$3,278.24  is  contained  in  $1,192,897.65,  or  about 
$363.89  net.  The  same  conclusion  will  be  arrived  at 
if  the  net  single  premium  for  insurance  be  divided  by 
the  net  present  value  of  an  annuity  of  $1.00.  That, 
indeed,  is  the  usual  course  when  making  this  illustra- 
tion. 

For  actuarial  and  accounting  purposes  all  these 
operations  are  simplified  (in  a  mathematical  sense- 
only)  and  short  methods  are  employed  to  reach  re- 
sults required.  The  mass  of  figures  is  codified  into 
commutation  tables,  and  they  are  then  expressed  in 
logarithms  in  large  part,  which  makes  it  possible  for 
divisions  and  multiplications  to  be  performed  by  sub- 
traction or  addition.  It  is  these  arrangements  for 
mathematical  convenience  which  give  to,  the  science 
of  insurance  an  appearance  of  mystery.  The  actual 
operations  are  simple  enough,  but  cumbersome. 

All  net  single  and  annual  premiums  for  whole  life 
insurance  are  arrived  at  in  the  same  manner  as  the 
foregoing.  To  such  net  premiums  a  loading  of  from 
25  to  40  per  cent  is  commonly  added  to  cover  all 
contingencies  and  expenses. 


31 


RATEMAKING— LIMITED-PAYMENT   AND    EN- 
DOWMENT. 

Endowment  is  the  antithesis  of  life  insurance;  that 
is  to  say,  an  endowment  is  conditional  upon  a  man's 
living,  while  life  insurance  is  pa^^able  only  at  death. 
A  simple  or  pure  endowment,  therefore,  is  synony- 
mous with  the  original  idea  of  tontine,  each  being  in- 
tended to  benefit  survivors  only. 

This  idea  was  early  adopted  as  a  corrective  of  the 
apparent  tendency  of  life  insurance  to  be  too  expen- 
sive to  those  who  live  long,  and  it  was  expected  to 
induce  many  to  insure,  by  the  hope  of  gain,  who, 
confiding  in  perfect  health  and  constitutions,  might 
otherwise  have  refused  to  act.  By  combining  the 
advantages  of  insurance  in  event  of  death  and  of  cer- 
tain endowment  in  event  of  survival,  it  was  hoped 
that  the  best  lives  might  be  attracted.  Recent  inves- 
tigations set  forth  in  Dr.  Emory  McClintock's  essay 
''On  the  Effects  of  Selection,"  seem  to  indicate  that 
this  hope  has  not  proved  groundless. 

Although  in  practice  the  endowment  is  very  rarely 
seen  except  connected  with  life  insurance,  yet  in  fact 
the  two  things  are  very  different  and  essentially  dis- 
tinct. So  far  as  any  real  gain  is  concerned,  the  two 
operations  might  as  well  be  in  separate  institutions. 
In  the  calculation  of  rates,  therefore,  it  is  necessary 
to  take  up  the  two  elements  separately,  one  being  the 
cost  of  the  endowment  and  the  other  the  cost  of  the 
insurance — one  the  providing  for  a  certain  payment 


32 

to  those  who   do  not  die,  the  other  providing  a  cer- 
tain payment  for  thope  who  do  die. 

The  company  which  agrees  to  pay  each  of  100,000 
men  now  aged  10  $1,000,  if  he  survives  to  age  30, 
must  have  a  total  of  $86,292,000.00  on  hand  20 
years  later,  according  to  the  actuaries*  table,  for  there 
will  be  86,292  people  A^et  living  to  demand  the  fulfill- 
ment of  that  contract.  The  lower  the  death  rate  has( 
been  the  more  will  Ha^c  to  demand  the  payment;  the 
higher  the  rate  has  been,  the  less  will  be  required  to 
meet  all  demands.  Assuming  the  experience  of  the 
table,  to  find  the  amount  required  to  be  on  hand  now 
to  meet  such  obligations  it  would  only  be  necessary 
to  discount  this  gross  amount  at  a  rate  of  compound 
discount,  such  as  may  be  assumed  to  be  certain  to  be 
secured.  Assuming  4  per  cent  as  such  a  rate,  it  is 
found  that  the  present  value  of  $1,000  due  in  20 
years  is  $456,387,  It  follows  that  the  present  value 
of  $86,292,000  will  be  $456.387X$36,292,  or  $39,- 
382,547.00. 

Now  if  the  original  100,000  boys  were  required  to 
put  into  the  pool  sufficient  to  pay  each  survivor 
$1,000  at  age  30,  each  would  have  to  pay  in  1-100,- 
000  that  amount  or,  approximately,  $393.82,  which 
is  the  net  single  premium  at  age  10  for  a  pure  endow- 
ment due  in  20  years.  The  net  annual  premium  may 
be  arrived  at  by  dividing  this  single  premium  by  the 
present  value  of  a  20  year  annuity  of  $1.00  at  age  10. 

Endowment  life  insurance  provides  not  only  for  the 
payment  of  endowments  tJ  the  survivors,  but  of  life 
insurance  to  those  that  die.  The  net  single  premium 
for  the  latter  can  be  founa  by  the  calculations  for 
term  insurance  rates  for  the  endowment  period. 


33 

This  net  single  premium  for  $1,000  at  age  10  for  a 
term  of  20  years  according  to  the  actuaries'  table  at 
4  per  cent  is  $92.75.  This  premium  covers  the  con- 
tingency of  dying  before  the  completion  of  theendowr- 
ment  period;  the  simple  endowment  premium  covers 
the  contingenc3^  of  surviving.  The  two  combined 
cover  all  contingencies  and  provide  for  the  payment 
of  a  certain  claim,  due  at  the  end  of  20  3'ears  or  at 
prior  death.  The  net  single  premium  therefore  at 
age  10  for  a  20  year  endowment  life  insurance  of 
$1,000  is  $393.82+$92.75  or  $486.57  in  all.  To  find 
the  net  annual  premium,  this  sum  should  be  divided 
by  the  present  value  of  an  annuity  of  $1.00  for  20 
years  from  age  10. 

In  the  case  of  semi-endowment  policies,  the  amount 
of  the  endowment  is  not  the  same  as  the  amount  of 
insurance,  being  but  one-half  as  much.  Other  pro- 
portions are  occasionally  used  under  a  similar  name, 
but  inaccurately.  In  such  case,  the  single  premium 
for  the  amount  of  the  endowment  and  the  single 
premium  for  the  amount  of  insurance  should  be  added 
together  as  before,  and  the  annuity  similarly  applied 
-as  a  divisor. 

In  the  case  of  limited-payment  life  policies',  the 
intent  is  to  provide  insurance  for  those  who 
die  before  the  completion  of  the  premium-pay- 
ing period  and  also  a  fund  sufhcient  to  furnish 
paid-up  insurance  to  all  who  survive  the  same 
period.  This  is  equivalent  to  a  partial  endow- 
ment life  insurance,  the  endowment  being  for  an 
amount  equal  to  the  net  single  premium  at  the  age 
attained  upon  completion  of  period;  for  such  single 
premium  is  the  net  amount  necessary  to  sustain  a, 


34 

paid-up  insurance  at  that  age.  Therefore,  to  calcu- 
late the  net  single  premium  for  a  limited-payment  life 
policy,  find  the  net  single  premium  for  term  insurance 
for  the  amount  of  the  policy  to  cover  the  premium- 
paying  period;  then  find  the  net  single  premium  for  a 
simple  endowment  equal  to  net  single  premium  for 
insurance  at  age  attained  at  the  close  of  the  period. 
The  sum  of  these  two  is  the  net  single  premium  for  a 
limited-payment  life  policy.  To  find  the  net  annual 
premium  proceed  as  before  to  divide  the  single  pre- 
mium by  the  present  value  of  a  temporary  annuity  of 
$1.00  for  the  premium-paying  period. 

The  annual  premium  may  be  ascertained  directly 
from  the  single  premium  for  a  whole  life  insurance  by 
the  same  process;  for  it  will  be  found  that  the  single 
premium  obtained  by  the  foregoing  process  and  the 
single  premium  obtained  by  process  described  in  the 
previous  paper  are  identical. 

As  has  been  said  before,  the  higher  the  death  rate 
has  been,  the  fewer  remain  to  draw  an  endowment; 
consequently  a  pure  endowment  contract  is  the  more 
profitable  to  a  company,  the  higher  the  death  rate 
has  been.  On  the  contrary, the  other  component  part 
of  an  endowment  life  insurance  premium,  the  term  in- 
surance element,  3''ields  the  more  profit  the  lower  the 
death  rate  has  been,  since  fewer  persons  have  by  dy- 
ing caused  outlay  for  death  claims.  In  endowment 
life  insurance,  the  claim  against  the  company  is  a 
certain  one,  the  only  question  being  as  to  time  of 
payment,  during  the  endowment  period  in  case  of 
death.  Hence  the  gain  because  of  one  death  fewer  in 
any  year  is  not  the  amount  which  would  have  been 
paid,  but  only  the  interest  on  the  same  to  the  ma- 


35 

turity  of  the  endowment  period.  The  gains  of  supe- 
rior mortality  on  endowment  policies  are  therefore 
small,  and  less  on  short  term  endowments  than  on 
others. 

While,  as  has  been  said,  the  endowment  and  life  in- 
surance transactions  are  essentially  distinct,  and  in 
fact  complementarj^  to  each  other,  and  while  they 
could  as  well  be  carried  on  in  different  companies,  it 
must  not  be  understood,  as  some  misguided  men  have 
thought  and  said,  that  it  is  equivalent  to  an  endow- 
ment life  insurance  to  carry  term  insurance  and  invest 
in  usual  channels.  The  endowment  portion  of  a  life 
insurance  premium  is  not  that  sum  which  paid  an- 
nually in  advance  and  improved  at  a  certain  rate  of 
interest  compounded  will  equal  the  promised  sum  at 
the  close  of  the  period.  It  is  that  smaller  amount 
which  will  be  sufficient  on  the  average  to  pay  the 
promised  sum  only  to  all  who  survive. 

In  instance,  the  annual  payment  in  advance  which 
produces  $1,000  when  compounded  at  4  per  cent  in- 
terest is  about  $32.29.  The  net  annual  premium  for 
a  20  year  endowment  life  insurance  at  age  20  is 
$36.97,  according  to  the  actuaries'  table  at  4  percent 
interest.  By  the  same  table  the  net  20  year  term  rate 
at  age  20  is  $8.24.  Deducting  this  from  the  endow- 
ment life  insurance  premium,  we  have  not  $32.29,  but 
$28.73  as  the  net  premium  for  a  simple  endowment. 

A  loading  for  contingencies  and  expenses  is  added 
to  the  net  premiums,  such  loading  commonly  vary- 
ing from  a  minimum  of  20  per  cent  on  the  net  pre- 
miums to  a  maximum  of  40  per  cent.  The  question 
of  "loading,"  its  purpose  and  misuse,  will  be  consid- 
ered hereafter  under  a  separate  heading. 


OF 


36 


RATEMAKING— SPECIAL  AND  UNUSUAL 
CONTRACTS. 

One  of  the  most  common  of  the  dep  artures  from  what 
is  considered  regular  in  life  insurance,  is  to  make  the 
premiums  payable  otherwise  than  annually.  Pre- 
miums payable  semi-annually,  quarterly,  bi-monthly 
and  even  monthly  are  too  common  to  excite  remark, 
and  in  industrial  insurance  weekly  premiums  are  the 
rule  rather  than  the  exception. 

The  treatment  of  these  departures  is  for  the  most 
part  unscientific  and  purely  arbitrary.  Almost  all 
offices,  for  the  convenience  of  their  book-keepers, 
choose  to  consider  all  policies  (unless  paid  for  a  longer 
period)  annual  premium  policies,  and  all  deferred 
premiums  practically  as  credits  granted.  This  is  car- 
ried to  the  point  of  deducting  all  such  deferred 
premiums  from  the  face  of  the  policy  upon  the  death 
of  the  insured.  Such  is  even  now  the  practice  of  al- 
most all  companies.  There  appears  to  be  no  good 
reason  why  proper  rates  should  not  be  established 
for  such  methods  of  payment  which  would  not  place 
the  policyholder  in  the  unenviable  attitude  of  debtor. 

The  extra  charge  usually  exacted  for  th^  privilege 
ofsmaller  and  more  frequent  payments  is  ample  to 
cover  the  added  risk— that  of  paying  a  few  dollars 
more  in  proportion  to  cash  received.  In  order  to  pay 
quarterly  or  semi-annually  in  the  least  arbitrary 
companies,  one  is  called  upon  to  pay  3  per  cent  more 
than  the  annual  rate;  in  many  companies  the  in- 
creased   cost   is    nearer  5  per    cent.      This   charge 


37 

amounts  to  a  very  high  interest  upon  the  deferred 
amount  and  no  advantage  accrues  other  than  that 
of  time  of  payment.  Of  course  these  are  small  mat- 
ters, only  worthy  the  time  spent  upon  them  because 
the  day  is  at  hand  when  insurers  \y^ll  demand  a  why 
and  wherefore  for  all  such  requirements. 

In  the  matter  of  monthly  payments,  however,  the 
overcharge  approaches  extortion,  the  less  excusable 
because  it  is  visited  upon  those  ^vho  are  less  able  to 
bear  it,  the  ^N^age workers.  The  method  of  adjusting 
such  premiums  is  commonly  to  divide  the  annual  rate 
by  ten,  thus  exacting  during  the  year  20  per  cent 
more  than  the  annual  premium.  As  these  premiums 
are  usually  paid  like  others,  into  the  office,  the  pleacf 
great  additional  expense  hardly  bears  examination. 

In  the  case  of  ^^eekly  premiums  there  is  more  justi- 
fication for  a  considerable  increase  of  cost,  because 
such  premiums  are  usually  collected  from  house  to 
house,  and  in  very  small  sums.  Yet,  even  in  such 
cases,  the  percentage  paid  for  collecting  rarely  exceeds 
15  per  cent  and  as  the  loading  on  whole  life  policies 
is  nearly  always  more  than  30  per  cent  of  the  gross 
premium,  it  ^would  seem  that  a  very  moderate  in- 
crease might  answer  after  aU. 

One  of  the  most  common  variations  is  the  introduc- 
tion of  the  return  premium  feature  into  policies.  The 
effect  of  this  feature  upon  the  unsophisticated  is  that 
of  bewilderment;  yet  the  method  by  which  this  is  ac- 
complished is  by  no  means  difficult  of  explanation. 
In  all  problems  jQt  presented,  v^^e  have  had  to  deal 
only  with  the  payment  of  a  definite  equal  sum  upon 
the  death  of  each  insured.  Suppose  instead  that  the 
agreement  was  to  insure  the  lives  of  1,319  people  now 


38 

aged  90  years  as  follows:  To  pay  $100  each  to  the 
heirs  of  all  who  died  the  first  year,  $200  for  all  who 
died  the  secondyear,  etc.,  at  arithmetical  progression, 
and  ending  in  $1,000  to  the  heirs  of  the  onemanwho 
died  at  age  100.  By  calculating  the  gross  amounts 
which  would  be  paid  out  each  year  for  death  losses 
in  this  manner,  then  reducing  such  amounts  by  com- 
pound discount  to  their  present  values  and  adding 
the  same  together,  we  arrive  at  the  total  amount 
it  would  be  necessary  to  have  on  hand  if  one 
undertook  these  insurances  without  expecting  any 
further  premiums.  That  gross  amount  divided 
by  the  number  insured,  (1,319)  will  yield  the  net 
single  premium  required  from  each  to  effect 
such  an  insurance.  By  dividing  this  single  pre- 
mium by  the  present  value  of  an  annuity  of  $1  in 
advance,  the  net  annual  premium  for  such  an  insur- 
ance is  found. 

Suppose,  now,  that  it  be  required  to  find  the  extra 
premium  to  be  charged  for  a  contract  to  return  a 
premium  of  $100  at  death.  It  is  evident  that  the 
transaction  is  separate  and  distinct  from  the  original 
insurance  and  is  in  fact  identical  with  the  contract 
already  described.  That  the  extra  premium  is  to  be 
returned  as  well  as  the  original  premium  only  appears 
to  complicate  the  matter,  for  it  is  easy  to  approxi- 
mate by  ordinary  arithmetical  means  the  actual 
premium  required.  Algebraic  means  while  really 
more  simple  and  direct,  are  not  within  the  scope  of 
the  present  book. 

Another  form  of  insurance,  now  becoming  more 
common  and  popular,  is  that  by  which  the  principal 
amount   is    payable  in    deferred  installments    after 


39 

death,  and  in  some  cases  after  maturity,  as  an  endow- 
ment. This  sort  of  poHcy  is  Yariously  known  as  an 
installment  contract,  an  annuity  contract,  a  trust 
certificate,  and  a  ^*  special "  contract.  The  rates  are 
apparently  somewhat  lower  than  those  of  other  pol- 
icies but,  as  in  so  many  other  things,  appearances  are 
here  deceitful.  The  only  mystery  about  these  contracts 
is  the  actual  insurance  carried,  which  is  not  the  princi- 
pal amount  named  in  the  policy  but  merely  the  pres- 
ent value  of  the  installments.  By  proceeding  with 
that  fractional  amount  as  the  principal  sum,  in  the 
beaten  path  of  previous  calculations,  it  w^ill  not  be 
found  difficult  to  make  rates  for  these  policies. 

Another  late  candidate  for  popular  favor  is  the 
**  Guaranteed  Interest  Bond,"  by  w^hich,  after  pay- 
ments cease,  the  insured  may  leave  the  principal  sum 
as  a  paid-up  policy  and  draw  a  certain  interest  an- 
nually thereon.  In  some  cases,  ivhere  the  interest 
does  not  exceed  4  per  cent,  there  is  no  extra  charge 
for  this  feature,  the  interest  being  just  what  it  seems. 
The  New  York  companies  in  general,  however,  and 
many  others  have  not  thought  it  best  to  assume 
so  high  a  rate  of  interest  in  their  calculations.  That 
fact  makes  the  determination  of  proper  rates  a  fresh 
and  somew^hat  unique  problem,  for  it  is  reallj^to  raise 
a  phantasm  of  what  is  not.  For  the  usual  style  of 
contract,  w^here  the  income  and  paid-up  insurance 
continue  for  the  life  of  the  assured,  the  rate  may  be 
arrived  at  either  (1)  by  combining  the  rate  for  a  lim- 
ited payment  life  policy  with  the  rate  for  a  deferred 
annuity  equal  to  the  desired  income,  or  (2)  by  com- 
bining the  rate  for  an  endowment  with  the  rate  for  a 
deferred  annuity  equal  to  the  difference  between  the 


40 

actual  interest  they  are  ready  to  guarantee  and  the 
income  promised.  Where, after  a  certain  further  num- 
ber of  years,  the  company  agrees  to  pay  the  principal 
over,  a  combination  of  the  rates  for  limited-payment 
endowment  and  for  an  annuity  equal  to  desired  in- 
come should  be  used  instead  of  first  combination  just 
given.  In  all  cases  where  the  company  is  not  in  fact 
willing  to  pay  as  an  interest  the  promised  income, 
the  reserve  value  at  the  beginning  of  income-paying 
period  is  larger  than  the  principal  sum  of  the  policy. 
The  latest  departure  is  the  continuous  instalment 
policy,  providing,  first,  for  a  definite  instalment  for  a 
term  of  years  and,  second,  for  a  continuation  of  the 
instalment  throughout  the  beneficiary's  life  if  he  or 
she  survives  the  term.  This  covers  the  usual  specious 
objection  to  a  survivorship  annuitj^,  that  the  bene- 
ficiary might  die  after  receiving  but  one  payment  and 
so  a  considerable  sum  be  lost;  and  it  also  covers  the 
more  substantial  objection  to  an  ordinary  instal- 
ment policy,  that  it  may  not  provide  an  income  for 
the  life  of  the  beneficiary.  A  rate  for  this  policy  is 
made  either  by  increasing  the  rate  for  an  ordinary 
instalment  policy  by  a  premium  covering  the  value 
of  the  contingent  annuity  beyond  the  term  of  the  in- 
stalment; or,  more  simply,  by  adding  to  the  rate  for 
a  survivorship  annuity  the  difference  between  the 
premiums  for  a  term  annuity-certain  and  a  term 
annuity  contingent  upon  life. 


41 


RATEMAKING-THE  LOADING. 

What  has  been  said  in  preceding  papers  on  the 
general  subject  of  ratemaking  has  concerned  only  net 
rates  or  the  premiums  which  will  be  sufficient,  assum- 
ing a  certain  rate  of  interest  and  a  death  rate  accord- 
ing to  the  tables,  to  cover  all  demands.  Possible 
errors  in  these  premises  are  not  taken  into  account. 
The  possibilities  of  losses  on  investments,  of  reduced 
interest  earnings,  of  augmented  death  losses,  are  not 
provided  for;  and  no  provision  is  made  in  the  net 
rate  for  any  expense  whatsoever. 

It  is  not  so  many  years  since  a  life  insurance  pre- 
mium was  first  divided  into  its  component  parts;  and 
a  much  shorter  time  has  it  been  since  insurance  men 
became  unanimous  about  the  necessity  for  loading. 
Among  the  first  of  the  many  altercations  into  which 
Elizur  Wright's  love  of  justice  led  him,  was  one  with 
a  then  reputable  English  company  which  was  ready 
to  prove  itself  solvent  on  the  basis  that  it  would 
hereafter  have  no  expenses  but  death  losses,  no  ex- 
cessive mortality,  no  interest  earnings  lower  than  the 
rate  assumed,  and  no  losses  on  investments.  In  other 
words,  in  the  judgment  of  their  actuary,  no  loading 
was  required.  That  view  was  supported  by  no  less 
an  authority  than  F.  G.  P.  Neison,  then  the  leading 
actuary  of  England  with  a  string  of  academic  titles 
following  his  name,  and  in  this  country  it  was  en- 
dorsed by  the  then  professor  of  mathematics  at  Yale. 
Of  course  both  were  disposed  to  scoff  at  this  untitled 


42 

interloper,  who  won  the  day,  nevertheless,  and  be- 
came heir  to  the  name,  ''  Father  of  Life  Insurance." 
The  position  which  he  declared  untenable  was  that 
future  premiums  will  not  be  required  to  cover  future 
exigencies,  and  that  it  is  safe  to  spend  more  than  the 
loading  now  and  recoup  from  future  savings.  Any 
such  charge  or  mortgage  against  future  premiums 
was  in  Mr.  Wright's  view  a  reduction  of  the  premium 
from  the  start  and  an  impairment  of  the  company's 
resources  which  deserved  attention.  The  outstand- 
ing brokerage  renewal  contracts  of  many  companies 
— that  is,  contracts  to  pay  renewals  as  part  compen- 
sation for  services  already  rendered  in  obtaining 
insurances — would  doubtless  be  regarded  by  the  old 
actuary,  were  he  living,  as  legitimate  matters  to  be 
considered  in  calculating  their  reserve  liabilities  and 
assets. 

All  of  which  goes  to  shov^  that  the  views  of  insur- 
ance  managers  as  to  the  proper  offices  of  the  loading 
on  premiums  are  yet  hazy  and  by  no  means  unani- 
mous. 

For  the  most  part  loading  is  added  to  net  premiums 
by  a  method  of  gross  percentage  without  regard  to 
the  purposes  for  which  the  same  is  collected.  Much 
of  the  calculation  must  of  necessity  be  crude;  but  it 
seems  clear  that  some  of  the  items  ought  easily  to  be 
treated  in  a  more  scientific  manner. 

The  only  effort  in  this  direction  of  which  we  are 
aware  is  that  of  Sheppard  Homans,  who  divides  the 
loading  on  natural  premium  pohcies  into  two  parts, 
one  being  for  expense  purposes  and  one  for  all  the 
other  various  purposes  for  which  loading  is  collected, 
but  mainly  for  possible  excessive  mortality.      Mr. 


43 

Homans  was  the  chief  defender  of  Mr.  Wright  in  the 
contest  before  mentioned;  and  he  carried  the  division 
of  premiums  into  their  component  parts  to  its  legiti- 
mate conclusion  when  he  introduced  the  plan  of 
apportioning  dividends  known  as  the  "contribution 
plan."  In  his  new  method  of  fixing  the  loading  on 
premiums,  he  calculates  the  part  for  expense  pur- 
poses at  a  level  amount  per  $1,000  of  insurance  and 
the  part  for  other  purposes  at  a  certain  percentage  of 
the  net  premium. 

As  in  all  branches  of  insurance,  commissions  use 
to  be  paid  on  the  basis  of  a  percentage  of  the  pre- 
mium, the  partition  of  the  loading  does  not  seem  very 
happy  in  that  regard.  Mr.  Homans  has  indeed  found 
it  possible  to  work  that  plan  only  at  a  commission  of 
so  much  per  $1,000;  but  even  to  do  that  he  has  been 
compelled  to  wipe  out  the  distinction  for  the  first 
year  of  insurance  between  one  part  of  the  loading 
and  another.  On  all  other  forms  of  insurance,  this 
method  has  proved  altogether  impracticable  and  the 
partition  of  the  loading  has  accordingly  been  aban- 
doned except  as  to  natural  premium  policies. 

The  method  by  which  loading  for  other  purposes  is 
calculated  is  more  to  be  commended.  It  must  be 
remembered  that  the  interest  factor  is  absent  from 
natural  premium  calculations;  no  provision  therefore 
is  required  for  decreasing  interest  or  losses  on  invest- 
ments. No  other  way  to  figure  a  margin  on  estima- 
ted death-loss  requirements  seems  so  sensible  as  to 
add  a  reasonable  percentage.  In  addition  to  the 
reasonable  appearance  of  this  feature,  the  fact  that 
every  dollar  of  this  part  of  the  loading  must  be  used 
for  its  own  purpose  and  no  other,  or  returned  to  the 


44 

insured,  would  form  a  curb  on  the  disposition  of 
some  insurance  officials  to  boo»t  expenses.  Such 
would  seem  salutary  and  beneficial  to  policyholders. 

It  may  fairly  be  assumed  that  the  expense  element 
should  be  a  percentage  of  the  gross  premium;  that 
the  element  to  cover  excessive  mortality  may  v^ell  be 
a  percentage  of  the  net  premium  on  whole  life  policies 
since  all  the  net  premium  is  eventually  expended  for 
mortality;  and  that  the  interests  of  policyholders 
demand  that  these  two  items  be  kept  separate  and 
distinct. 

Provision  for  decrease  in  interest  can  only  be  prop- 
erly made  by  assuming  a  rate  certainly  low  enough 
at  the  outset  of  net  premium  calculations.  Losses  on 
investments  must  in  the  nature  of  things  be  met  from 
surplus  already  accumulated  and  not  from  future 
premiums.  Therefore  it  seems  clear  that  that  item 
can  safely  be  eliminated  from  the  calculation.  In  any 
case  no  method  of  approximating  a  proper  loading 
for  contingencies  of  that  kind  has  been  suggested. 

Such  loading,  if  necessary  at  all,  would  be  required 
to  a  greater  degree  on  endowment  than  on  other 
policies;  and  might  make  good  the  difference  between 
the  loading  required  to  cover  possible  excessive  mor- 
tality on  such  policies  and  on  life  policies.  For  it 
must  be  borne  in  mind  that  the  mortality  element  in 
an  endowment  policy  is  only  the  net  term  premium 
for  the  amount  and  for  the  term  of  the  policies,  if 
indeed  it  can  fairly  be  considered  so  much. 

On  the  other  hand,  of  course,  the  factor  for  expense 
must  be  much  larger  owing  to  the  usages  in  the  mat- 
ter of  commissions,  whatever  may  be  the  effect  upon 
the  desirability  of  endowments  as  investments. 


45 

In  practice  at  present,  companies  load  life  and 
limited-payment  life  rates  from  33i/^  per  cent  to  40 
per  cent,  making  25  per  cent  to  33%  per  cent  of  the 
gross  premiums;  and  endowment  rates  from  20  per 
cent  to  25  per  cent,  making  from  16%  per  cent  to  20 
per  cent  of  the  gross  premiums,  unless  for  very  long 
terms,  when  the  loadingisthe  sam^  as  on  life  policies. 
This  loading  is  considered  in  all  life  insurance  calcu- 
lations as  a  single  component  of  the  premium  and  all 
of  it  may  be  used  for  expense  purposes  at  the  option 
of  the  management. 


46 


PREMIUMS— THEIR  COMPONENT  PARTvS. 

The  premium  on  a  term  policy,  a  life  policy,  a  lim- 
ited-payment life  policy,  or  in  fact  any  policy  involv- 
ing no  'other  payment  than  at  death,  consists  ot 
two  parts,  the  loading  for  expenses  and  contingen- 
cies, and  the  net  premium  solely  for  mortality 
purposes.  Not  only  is  all  the  net  premium  required 
for  mortali+y  purposes ;  but  it  would  be  insufficient, 
were  it  not  supplemented  by  interest  on  the  sums  re- 
maining unexpended  from  year  to  year.  That  it 
commonly  requires  somewhat  less  money  is  owing, 
not  primarily  to  the  size  of  the  net  premium,  but  to 
the  fact  that  death  has  in  many  cases  been  deferred 
aifew  months  or  years  longer,  and  to  the  further  fact 
that  abetter  interest  has  been  earned  than  it  would 
be  safe  to  count  on. 

If  no  interest  were  earned  upon  the  funds  carried 
over  from  year  to  year,  the  net  premiums  would  be 
insufficient  to  cover  the  death  losses  even  upon  a 
much  more  favorable  experience  than  has  yet  been 
known,  or  in  fact  on  any  possible  experience  involv- 
ing the  final  death  of  all. 

Especial  emphasis  upon  this  point  is  proper,  as  cer- 
tain  misleading  analyses  of  premiums  have  been  put 
forth  by  many  assessment  companies  and  even  by 
some  regular  companies  seeking  to  do  a  natural 
premium  business.  These  analyses  have  the  air  of 
scientific  precision  and  are  the  more  dangerous  be- 


47 

cause  they  are  half-truths  and  deceive  many  who 
have  a  smattering  of  sound  learning. 

By  these  the  net  premium  is  divided  into  two  parts, 
known  as  the  mortuary  and  the  reserve  element. 
The  first  of  these  is  described  as  the  part  really  re- 
quired for  insurance,  and  the  second  is  variously  ex- 
plained as  a  ''self-insurance,  "in  vestment  portion,  etc. 
The  inference  meant  to  be  drawn  from  this  analysis 
is  that  no  necessity  exists  for  any  charge  above,  the 
mortality  element  with  a  small  addition  as  a  pre- 
cautionary safeguard. 

The  half-truth  is  that  the  net  premium  is  necessa- 
rily composed  of  money  to  be  expended  today  and 
money  to  meet  tomorrow's  engagements.  The 
amount  of  money  to  be  expended  this  year  is,  how- 
ever, not  the  same  as  the  amount  to  be  expended 
next  year;  and,  as  the  whole  net  premium  remains 
the  same,  it  follows  that  the  amount  available  for 
future  engagements  will  vary  in  inverse  ratio.  In 
scientific  phraseology  a  net  premium  is  a  fixed  sum 
composed  of  two  complementary  variables.  The 
line  separating  the  two  elements  of  the  premium 
moves  every  year  and  never  resumes  its  former  posi- 
tion. 

But  the  distinction  between  the  two  is  merely  a 
matter  of  convenience;  both  parts  are  for  the  same 
purpose,  namely:  to  pay  death  losses.  Reference  to 
the  papers  upon  rate-making  will  show  that  in  the 
calculation  of  the  net  premium  no  provision  is  made 
for  any  other  purpose;  the  calculation  was  merely  to 
find  the  amount  of  premium  necessary  to  pay  losses. 
The  only  distinction  between  the  so-called  elements 
of  the  premium  is  that  of  present    and   future  re- 


48 


quirements;  and  the  part  which  is  called  the  mortu- 
ary element  in  such  analyses  is  the  portion  which  a 
mortality  exactly  corresponding  to  the  table  would 
require  to  be  at  once  expended,  while  the  part  called 
the  reserve  element  is  an  advance  against  future 
claims  sure  to  come. 

The  folly  of  such  analyses  is  more  fully  seen  when 
the  single  premium  is  examined.  In  that  case  the 
mortuary  element  is  very  small,  compared  with  the 
reserve;  because  the  reserve  element  comprises  all 
future  mortuary  demands,  discounted.  In  the  same 
way  the  reserve  element  in  limited-payment  life  pre- 
miums is  an  installment  toward  caring  for  mortuary 
d«.mands  after  the  close  of  the  premium-paying  period . 
In  the  same  way  again  the  reserve  element  in  a  whole 
life  premium  is,  with  its  interest,  to  cover  the  defi- 
ciencj'  of  future  premiums  in  meeting  future  mortuary 
demands. 

A  precisely  similar  office  is  performed  by  the  part 
left  unexpended  from  a  natural  or  annual  renewable 
term  premium ;  it  is  expected  of  it  that  it  will  pay 
the  losses  until  the  next  premium  is  paid  in.  In  the 
case  of  a  term  policy  for  more  than  one  year,  the 
office  of  the  money  left  unexpended  is  soon  made 
clear,  since  the  whole  premium  would  not  be  suffi- 
cient to  meet  the  mortuary  demands  in  the  later 
years  of  the  term  if  not  aided  by  the  accumulation 
made.  During  those  years  the  reserve  element  of  the 
premium  is  less  than  nothing.  By  the  close  of  the 
term  all  the  reserve  is  expended  in  payment  of  death 
claims. 

The  same  is  true  also  of  all  life  policies,  the  term 
being  the  whole  life  of  the  holder.    The  long  term  of 


49 

the  policy  confuses  many  because  the  accnmtilation  in- 
creases for  so  many  years  before  the  current  mortuary 
demands  exceed  the  net  premium.  Even  then  the  de- 
ficit is  made  good  from  the  interest,  of  which  some- 
thing remains  to  swell  the  accumulation.  In  fact, 
the  growth  of  the  fund  only  ceases  at  the  death  of 
the  insured;  and  if  he  reaches  what  is  assumed  to  be 
the  ultimate  limit  of  life,  the  reserve  amounts  to  the 
face  of  his  policy. 

This  is  why  the  reserve  in  whole-life  premiums  is 
called  by  some  the  self-insurance  fund,  as  indeed  it  is, 
in  the  sense  that  after  contributing  to  meet  other 
mortuary  demands  it  also  makes  sure  of  meeting  its 
own.  Who  would  be  content  to  carry  a  policy  which 
would  be  sure  to  provide  for  all  death  claims  but  his 
own  ?  But  the  reserve  element  is  not  self-insurance 
in  the  sense  that  is  commonly  intended,  that  it  serves 
no  purpose  except  to  accumulate  against  the  day  of 
certain  death.  Its  interest  earnings  are  part  and 
parcel  of  itself,  impossible  if  it  were  not;  and  for 
nianj^  of  the  later  years,  even  in  a  whole-life  policy, 
such  interest  is  called  upon  to  make  good  the  defi- 
ciencies of  the  regular  premium  in  meeting  current 
mortuary  demands. 

A  whole-life  premium, like  an  endowment  premium, 
must  cover  not  merely  risk  but  certainty  as  well;  must 
meet  the  demands  of  claims  that  may  come  and  the 
demand  of  a  claim  that  v^ill  come.  It  therefore  con- 
sists of  two  essential  elements  not  touched  upon  in 
the  puerile  analyses  referred  to,  which  are  in  fact  only 
book-keeping  conveniences;  these  two  elements  are 
term  insurance  to  the  assumed  lirnit  of  life  and  a  pure 
endowment  due  at  that  time.    The  term  element  cov- 


50 

ers  the  danger  of  dying,  the  endowment  element  the 
possibility  of  living.  Pure  endowment  provides  for 
a  sum  to  be  paid  if  the  insured  lives  to  age  100  :  term 
insurance  for  a  sum  to  be  paid  if  he  dies  before  that 
time.  To  see  how  small  a  part  of  the  whole  the  en- 
dowment element  is,  it  is  only  necessary  to  make  these 
calculations  separately,  as,  for  instance,  by  the 
actuaries'  table  and  4  per  cent  interest  at  age  50. 

Term  or  others' insurance  element $37  77 

Endowment  or  self  insurance  element 01 

The  total $37  78 

In  other  words,  1  cent  a  year  from  all  men  now 
living  at  age  50  will  supply  $1,000  for  each  of  them 
who  survives  to  age  100.  Of  course,  like  all  other 
components,  the  endowment  element  is  much  larger 
if  the  insurance  is  taken  late  in  life.  At  ages  under 
50  it  is  less  than  1  cent  per  $1,000  insurance.  The 
deposit  for  reserve,  varying  from  year  to  year,  com- 
prises both  the  deposit  for  reserve  on  the  term  element 
and  the  whole  of  the  pure  endowment  element.  For 
the  practical  purposes  of  accounting,  it  is  not  neces- 
sary to  make  such  a  distinction;  and  tables  of  the  cur- 
rent cost  of  insurance,  the  so-called  mortuary  portion 
of  the  premium,  answer  all  purposes.  The  cost  of  in- 
surance on  all  plans  is  found  each  year  by  calculating 
by  the  mortality  of  the  tables  the  cost,  not  of  the  in- 
surance named  in  the  policy,  but  of  that  insurance  less 
any  reserve  accumulations.  To  avoid  constant  cal- 
culations these  items  are  made  up  into  tables,  and  the 
various  amounts,  which  taken  together  with  these 
equal  the  level  net  premium,  are  denominated 
deposits  for  reserve. 


51 

As  has  been  more  than  hinted  in  the  foregoing,  an 
endowment  premium  consists  primarily  of  t\70  essen- 
tial elements,  a  term  insurance  and  a  pure  endow- 
ment element.  From  year  to  year  there  will  be  re- 
served not  merely  the  whole  endowment  element, 
which  is  merely  intended  to  pay  off  the  insured  at 
the  close  of  the  endowment  period,  but  during  the 
earlier  years  the  deposit  for  reserve  on  the  term  in- 
surance as  well.  In  the  later  years,  when  the  cost  of 
insurance,  the  so-called  mortuary  element,  is  larger 
than  the  term  element,  the  reserve  on  the  term  insur- 
ance is  gradually  v/iped  out. 

The  cost  of  insurance  as  a  mortuary  element  be- 
comes peculiarly  ridiculous  in  term  insurance  when 
it  comes  to  exceed  the  net  term  premium,  of  which 
it  is  supposed  to  be  a  part. 


52 


RE-INSURANCE  RESERVES. 

The  reserve  of  a  life  insurance  company  is  that  sum 
of  money  which  it  would  have  to  pay  another  com- 
pany to  assume  its  insurances.  In  former  times  how 
much  this  reserve  should  be  was  left  to  the  judgment 
of  the  managers  of  the  various  companies;  it  was 
expected  that  the  intelligence  of  the  public  and  the 
natural  caution  of  the  shareholders  would  be  ample 
protection  against  too  small  reserves. 

This  was  found  to  be  erroneous.  The  ordinary 
rules  of  business,  which  are  meant  to  govern  cases 
where  the  entire  assets  are  the  property  of  the  mana- 
gers, will  not  apply  where  the  larger  part  of  the  funds 
is  in  the  nature  of  a  trust,  the  beneficial  ownership 
being  in  others.  In  an  ordinary  business,  capital  is 
active,  and  it  is  evident  enough  that  to  withdraw  it 
will  cripple  the  business  and  thus  react  to  the  propri- 
etor's disadvantage.  In  insurance  corporations  cap- 
ital simply  accumulates  so  long  as  the  company  is 
pushing  its  business;  the  purpose  for  which  it  is 
accumulating  is  not  always  clear;  and  to  a  share- 
holder it  would  seem  a  plain  matter  that  all  above 
what  is  absolutely  required  for  safet3'  should  swell  his 
dividends.  Naturally  too  he  would  view  the  amount 
required  through  a  reversed  telescope,  especially  as  it 
will  not  be  needed  for  many  years.  Such  dangers  are 
not  imaginary,  as  may  be  seen  by  looking  over  the 
history  of  life  insurance. 


53 

In  England,  governmental  interference  has  been  but 
partial  and  largely  advisory.  Great  latitude  is 
allowed  in  the  matter  of  mortality  tables  to  be  em- 
ployed, and  a  little  freedom  is  granted  in  the  matter 
of  interest  rate  assumed.  Too  wide  departure  from 
the  common  standards,  however,  would  not  be  per- 
mitted. A  company  might  easily  make  itself  ridicu- 
lous by  too  favorable  assumptions — a  fact  which  it 
could  not  conceal  since  a  valuation  b^^  a  competent 
actuary  must  be  made  at  frequent  intervals  and  the 
bases  of  the  calculations  given  in  his  reports.  The 
latitude  given  is  broad  enough,  however,  to  admit  of 
considerable  variations  in  premiums  charged;  though 
it  is,of  course,  considered  amark  of  superior  strength 
to  be  able  to  qualify  under  the  most  severe  stand- 
ards. 

If  companies  undertook  to  be  reckless  concerning 
reserves  in  England,  it  may  well  be  said  that  they  felt 
sure  of  freedom  in  that  regard  in  America.  Thanks 
are  mainly  due  one  man,  the  late  Elizur  Wright,  of 
Massachusetts,  for  those  governmental  precautions 
v^hich  have  held  in  check  the  marked  tendencies 
toward  recklessness  on  the  part  of  American  compan- 
ies. When  he  began  his  work,  under  a  statute  calling 
for  an  early  compliance  with  tht  reserve  requirements 
of  the  actuaries'  tables  and  four  per  cent  interest,  a 
then  popular  company  in  Hartford  reported  that  its 
re-insurance  reserve  was  a  certain  sum  because 
another  company  was  willing  to  take  over  its  busi- 
ness for  that  sum.  Another  company,  this  time  an 
importation  from  Great  Britain,  figured  out  a  surplus 
exceeding  its  entire  assets  by  assuming  that  old  busi- 
ness could  be  cared  for  without  expense.     This  plea 


54 


had  the  support  of  F.  G.  P.  Nelson,  then  regarded  the 
highest  actuarial  authority  in  England,  and  he  was 
seconded  by  the  professor  of  mathematics  in  Yale. 
To  both  of  these  gentlemen  the  mathematical  result 
was  conclusive,  regardless  of  business  common  sense. 

Fortunately  for  the  security  of  the  insuring  public, 
such  tactics  were  not  successful  against  the  sturdy 
sense  of  Elizur  Wright,  who  not  merely  knew  what 
he  knew,  but— rarest  of  all  accomplishments— knew 
how  to  make  others  know  it.  The  reasonable  test  of 
solvency  proposed  by  him  was  generally  adopted 
and  enforced. 

The  position  of  Dr.  Wright  was,  that  it  should  not 
be  assumed  that  any  company  would  insure  the  risks 
of  another  at  a  less  premium  than  the  latter  com- 
pany exacts,  nor  at  less  premium  than  the  net 
premium  (actuaries'  four  per  cent)  even  if  the  latter 
company  did  business  that  way.  To  assume  that 
one  company  would  take  over  the  business  of  another 
at  less  than  the  premiums  charged  would  be  to 
assume  that  the  premiums  charged  were  exorbitant. 
To  assume  that  any  company  could  afford  to  take 
over  the  risks  at  less  than  net  premiums  (actuaries' 
four  per  cent)  would  involve  the  absurdity  of  believ- 
ing that  an  average  company  had  an  experience 
better  than  the  average;  for  to  be  safe  the  re-insur- 
ance reserve  must  be  not  what  would  re-insure  the 
business  in  a  particular  company,  but  what  would 
probably  re-insure  it  in  any  well-regulated  company. 
A  company  may  be  justified  in  assuming  that  it  can 
do  better  than  the  average  in  carrying  on  its  own 
business;  it  cannot  be  justified  in  assuming  that  it 
can  at  will  find  others  able  and  willing  to  do  so  in  its 


55 

stead.  It  may  sell  insurance  at  whatsoever  premiums 
it  will,  but  it  must  show  itself  to  be  at  all  times 
able  to  pay  others  for  re-insurance  at  the  lowest 
average  rates  they  could  afford  to  accept.  For 
instance,  the  usual  rate  at  age  30  for  a  one  year  term 
policy  is  $15.00  a  year  for  $1,000  insurance;  the  net 
premium  (actuaries'  four  per  cent)  is  $7.78.  Now, 
if  a  company  charged  the  former  premium,  it  should 
be  estopped  by  that  fact  from  claiming  that  it  could 
re-insure  a  risk  with  six  months  to  run  at  the  latter 
rate,  for  it  would  thus  convict  itself  of  extortion.  On 
the  contrary,  if  a  company  reported  its  premium  as 
$5.00  a  year,  it  should  not  be  permitted  to  use  that 
figure  in  calculating  its  reserves,  since  it  is  clear  that 
no  company  would  be  likely  to  accept  the  re-insur- 
ance at  a  less  premium  than  is  required  by  average 
experience. 

Since,  then,  a  company  is  not  permitted  to  use  its 
own  large  premiums  as  an  argument  for  a  lower  re- 
serve-thereby confessing  their  exorbitance— it  follows 
that  in  practice  it  is  as  well  to  use  net  premiums  to 
calculate  reserves.  The  problem  is  a  simple  one  in 
the  case  of  one-year  term  policies;  a  part  of  the 
year's  premium  proportionate  to  the  unexpired  term 
is  charged.  Equally  simple  is  the  problem  in  the 
case  of  a  paid-up  life  policy;  it  would  be  necessary  to 
pay  over  the  net  single  premium  at  the  age  of  the  in- 
sured at  date  of  re-insurance. 

In  the  case  of  whole-life  policies  with  annual  pre- 
miums, a  new  feature  is  introduced,  which  at  first 
sightxomplicates  matters.  The  new  company  would, 
of  course,  charge  a  man  now  50  the  rate  at  age  50, 
while,  if  he  has  been  insured  for  20  years,  the  old 


56 


company  is  receiving  only  the  rate  at  age  30.  The 
contract  with  the  insured  will  not  admit  of  a  larger 
demand  upon  him  than  the  specified  premium.  It 
follows  therefore  that  in  order  to  effect  this  re-insur- 
ance the  old  company  must  each  year  during  the  life 
of  the  insured,  pay  the  difference  between  the  rates  at 
age  30  and  at  age  50.  It  may  avoid  that  by  paying 
the  discounted  value  of  such  differences  or,  in  other 
words,  the  present  value  or  net  single  premium  of 
an  annuity  on  the  insured's  life  equal  to  the  difference 
in  premiums.  Therefore  such  is  also  the  present 
value  of  the  company's  liability  on  the  policy  and 
the  proper  reserve.  Where  the  actual  premium  is 
lower  than  the  net  premium  assumed,  the  difference  is 
treated  as  an  additional  liability  and  the  present 
value  of  an  annuity  of  like  amount  is  added  as  a  spe- 
cial reserye. 

The  method  of  ascertaining  the  reserve  on  limited- 
payment  life  and  endowment  policies  is  substantially 
the  same.  If  it  is  proposed  to  re-insure  a  twenty- 
payment  life  policy,  issued  at  age  30,  and  which  has 
run  five  years,  it  is  evident  that  the  new  company 
must  in  some  way  get  the  equivalent  of  the  premiums 
on  a  fifteen-payment  life  issued  at  age  35.  From  the 
insured  it  can  collect  but  the  premiums  specified  in 
the  policy;  it  follows,  therefore,  that  it  must  demand 
from  the  old  company  the  equivalent  of  an  annuity 
of  the  difference  between  the  two  premiums.  This 
annuity  differs  from  the  annuity  mentioned  in  whole- 
life  reserve  calculations,  in  that  the  former  is  a  term 
annuity  payable  for  fifteen  years  if  the  insured*  sur- 
vive, while  the  latter  is  a  life  annuity  payable  as 
long  as  the  insured  survives. 


57 

The  calculation  of  endowment  reserves  proceeds 
upon  precisely  similar  lines;  indeed,  a  limited-pay- 
ment life  policy  is  in  effect  an  endowment  for  an 
amount  equal  to  a  net  single  premium  for  life  insur- 
ance at  the  age  attained  at  close  of  premium -tDaying 
period. 

The  usual  practice  regarding  policies  on  which  pre- 
miums less  than  annual  are  payable  is  to  calculate 
reserve  liability  as  if  paid  by  annual  premiums  and 
then  count  deferred  premiums  as  part  of  the  re- 
sources. This  is  because  such  deferred  premiums  are 
regarded  as  temporary  credits  to  be  deducted  in  any 
settlement  of  the  policy. 


5S 


SURPLUS-WHENCE  DERIVED. 

In  the  conduct  of  a  life  insurance  business  a  gain 
may  be  made  in  all  or  either  of  three  directions.  The 
two  simpler  sources  of  profit  are  the  realization  of 
higher  interest  than  was  counted  on  and  the  saving 
of  a  portion  of  the  loading  charged  to  cover  expenses 
and  exigencies.  In  the  management  of  the  business 
of  nearly  all  companies  a  profit  is  certain  to  arise 
from  a  higher  interest  experience  than  was  assumed 
in  making  rates.  If  there  were  not  a  profit  from  this 
source,  it  would  be  evident  that  the  assumed  interest 
w^as  too  high,  and  the  rates  based  thereon  danger- 
ously low.  The  object  of  rate  computations  and  of 
laws  fixing  the  interest  factor  to  be  used  in  reserve 
calculations  is  to  avoid  thepossibility  of  dangerously 
low  rates;  and  to  accomplish  that  purpose  a  lower 
interest  than  the  current  rate  is  alw^ays  used.  In 
consequence,  as  has  been  said,  a  profit  is  practically 
certain  to  arise  from  this  source,  since  no  company 
now-a-days  dares  to  disregard  the  plain  requirements 
of  a  conservative  business.  Such  has  not  always 
been  the  case,  however.  When  Elizur  Wright  began 
his  crusade  against  reckless  methods  in  life  insurance, 
a  then  popular  Connecticut  company  reported  that 
its  reserves  were  on  a  6  per  cent  basis.  It  was  not 
solvent  even  on  that  basis;  but,  had  it  been  possible 
for  it  to  continue  until  the  present,  it  would  now  be 


59 


an  exception  to  the  rule  mentioned,  for  it  certainly 
would  not  realize  any  profit  from  excess  interest. 

Gains  from  the  margin  or  loading,  proving  more 
than  suflScient  to  cover  the  expenses  and  contingen- 
cies for  which  it  is 'collected,  should  be  reasonably 
constant  and  stable.  Conservatism  requires  also 
that  the  addition  to  the  net  premium  be  ample  pi  o- 
vision  for  the  expenses  and  possible  losses  other  than 
death-claims.  Every  argument  in  favor  of  caution 
in  other  respects  is  equally  applicable  in  favor  of 
sufficient  loading,  though  the  legislatures  have  not 
yet  mediatel3^  or  immediately  compelled  such  action. 
The  facts  indicate  that  some  such  interference  would 
not  be  improper,  since  the  percentage  of  premium  re- 
ceipts used  for  expenses  and  other  purposes  for  which 
the  loading  is  collected  varied  in  1891  from  17.2  to 
41.9  in  the  companies  of  the  United  States.  The 
companies  experiencing  the  largest  expense  outlay 
w^ere  not  the  companies  doing  the  largest  new  busi- 
ness. The  average  percentage  in  all  companies  for 
ten  years  past  is  22.7,  which  seems  to  indicate  that 
no  very  large  gain  is  to  be  expected  from  the  loading, 
which  usually  varies  from  20  to  33^2  per  cent  of  the 
whole  premium,  averaging  perhaps  a  little  over.  25 
per  cent.  Companies  which  habitually  expend  more 
than  the  whole  loading  are  practically  nullifying  the 
conservative  limitations  of  the  State  and  defjangthe 
laws  of  probability.  For  any  excess  of  expenditure 
over  the  loading  must  be  made  good  from  the  gains 
from  other  sources,  and  to  proceed  to  such  expendi- 
ture is  to  assume  that  the  net  premium  is  more 
than  equal  to  its  offices  and  will  yield  a  profit  at 
least  sufficient  to  offset  the  excess  of  expenditure.    In 


60 

any  case,  a  company  having  such  an  expense  ratio 
not  merely  gains  nothing  on  its  loading  but  is  com- 
pelled to  recoup  its  loss  in  that  regard  from  the  gains 
from  other  sources. 

In  the  case  of  limited-payment  and  more  especially 
single-payment  policies,  it  certainly  should  not  be 
considered  that  there  is  a  gain  upon  the  loading  just 
because  the  immediate  expenses  and  contingent 
losses  do  not  equal  the  loading.  For  in  such  cases 
the  loading  is  not  merely  a  provision  for  this  year's 
expenses  and  other  contingencies,  but  for  the  same 
in  future  years,  as  well,  v^hen  no  premiums  are  to  be 
paid.  To  assert  that  no  such  provision  is  necessary 
or  desirable  is  to  deny  the  very  premises  of  the  argu- 
ment for  loading. 

Of  the  other  source  of  profit,  the  saving  on  death- 
loss  estimates,  less  explanation  is  usually  thought 
necessarj^  than  of  either  of  the  foregoing.  Notwith- 
standing this,  the  subject  requires  much  closer  inves- 
tigation and  is  much  moie  complex  than  either  of  the 
others;  for  into  it  enters  that  fact,  so  often  lost  sight 
of,  that  death  is  not  a  chance  but  a  certainty  and 
that  the  only  chance  is  in  regard  to  the  time  of 
death.  In  respect  to  all  policies  covering  the  entire 
period  of  life,  therefore,  it  is  not  the  case  that  the 
company  whose  actual  loss  experience  is  but  one 
million  dollars  against  an  expected  loss  of  a  million 
and  a  half  has  gained  from  that  source  one-half  mill- 
ion dollars,  for  every  one  of  the  claims  which  did  not 
fall  due  this  year  is  certain  to  fall  due  some  time.  In 
the  premiums  there  is  not  made  any  provision  for 
paying  these  claims  at  another  time,  but  instead 
only  a  provision  for  meeting  the  demands  of  other 


61 

policies^  It  follows,  therefore,  that  the  real  gain  will 
be  the  interest  actually  earned  on  this  half  million 
before  it  is  needed,  plus  the  premiums  and  interest  on 
the  same  which  those  who  did  not  die  as  expected 
pay  in  before  they  do  die.  Of  course  the  original  rate- 
calculations  were  not  made  with  an  expectation 
that  these  men  pay  premiums  after  they  die)Ahere- 
fore  any  premiums  that  they  pay  after  their  expected 
deaths  constitute  an  element  of  gain.  It  is  perhaps 
clear  from  all  this  that  the  subject  of  gains  on  mor- 
tality is  in  a  degree  involved  and  difficult. 

To  arrive  at  the  proper  method  of  computing  such 
gains  it  is  necessary  to  consider  what  would  be  re- 
quired to  reinsure  these  persistent  survivors.  Since 
they  have  not  died,  it  is  evident  that  the  only  ob- 
jection to  counting  the  face  of  their  policies  as  profit 
is  the  fact  that  they  must  still  be  insured  at  the  old 
premium.  Whatever  then  wrill  reinsure  them,  the 
new  company  to  receive  only  the  old  premiums 
thereafter,  is  clearly  the  measure  of  what  is  to  be  de- 
ducted from  the  apparent  gain  to  get  at  the  real 
gain.  For  if  they  are  reinsured,  there  is  no  longer 
any  offset  of  the  gain.  Of  course  the  company  can 
itself  well  afford  to  take  the  risk  but  only  on 
the  same  terms,  that  is,  for  a  consideration  of  the 
present  reserves  and  all  future  premiums. 

In  recapitulation,  upon  all  policies  running  for  the 
whole  period  of  life  a  less  mortality  than  is  expected 
results  in  a  gain  of  the  amount  not  expended  plus  all 
future  premiums,  less  the  cost  of  carrying  on  the  in- 
surance, which  is  the  present  net  reserves  plus  all 
future  premiums.  Eliminating  the  element  of  future 
premiums  common  to  both,  the  statement  becomes 


62 

simply:  the  gain  is  the  whole  amount  not  expended 
less  the  present  net  reserves  on  the  equivalent  insur- 
ance. 

The  same  is  clearly  the  case  in  endowment  insur- 
ance also.  For  if  Jones  does  not  die  this  year  as  was 
expected,  the  company  will  certainly  pay  out  the 
amount  saved  thereby  either  before  the  expiration  of 
the  term  as  a  death-loss  or  at  its  expiration  as  an 
endowment.  To  get  rid  of  this  necessity  the  com- 
pany must  reinsure  the  policy,  which  will  require  the 
entire  reserve  and  all  future  premiums.  Therefore 
the  real  saving  is  the  apparent  gain  less  such  re- 
serve. 

In  term  insurance  for  longer  than  one  year,  the 
same  applies;  for  if  the  insured  does  not  die  as  ex- 
pected, it  is  necessary  to  provide  him  with  insurance 
as  per  contract,  which  will  require  the  present  reserve 
and  all  future  premiums. 

In  annual  term  or  natural  premium  insurance,  it  is 
otherwise,  as  each  year's  insurance  is  a  separate 
transaction.  Even  when  renewable  by  their  terms, 
such  policies  are  supposed  to  be  reinsurable  at  the 
close  of  their  policy -years  without  other  considera- 
tion than  the  transfer  of  future  premiums.  That  this 
could  be  done  in  practice  is  doubtful;  but  the  rate 
is  each  year  supposed  to  be  sufficient  to  cover  the 
risk  and  the  objections  to  such  reinsurance  are  ob- 
jections to  the  plan,  not  to  the  price.  The  apparent 
gain  therefore  on  such  policies  is  the  actual  gain. 

Thus  in  general  it  is  true  that  the  apparent  gain  at 
the  expiration  of  the  terms  of  all  sorts  of  policies  is 
the  actual  gain;  and  that  apparent  gains  previous  to 
that  time  must  be  diminished  by  the  cost  of  the  in- 


63 

surance  which  is  to  be  carried  on  account  of  the  per- 
sons who  refuse  to  die  at  the  proper  time. 

What  has  been  said  does  not  furnish  a  formula  for 
ascertaining  the  surplus  earnings  of  a  company.  It 
will  be  found  of  greater  importance  in  apportioning 
the  profits.  The  simplest  method  of  determining  the 
actual  surplus  of  the  year  is  by  the  balance  sheet, 
which  on  one  side  shows  the  assets  brought  forward 
from  the  previous  year  plus,  the  receipts  of  the  year, 
and* on  the  other  the  actual  expenditures  plus  the  re- 
insurance reserve  at  the  end  of  the  year  and  the  sur- 
plus brought  forward  from  the  previous  year.  The 
difference  between  these  totals  will  be  the  profit  on 
the  year's  business. 


64 


SURPLUS— HOW  APPORTIONED. 

In  purely  stock  companies  the  problem  of  appor- 
tioning surplus  offers  no  special  difficulties,  since  all 
profits  belong  to  the  proprietary  stock.  But  it  is 
peculiar  to  life  insurance  that  it  seems  to  demand  a 
mutual  system  by  requiring  heavy  margins  in  all 
directions  in  order  to  insure  safety.  Since  one  must 
either  insure  for  life  or  a  long  term  or  run  the  risk  of 
being  without  insurance  and  uninsurable,  it  follows 
that  the  permanence  and  security  of  the  institution  is 
of  the  greatest  moment.  That  can  only  be  assured 
by  paying  premiums  adequate  beyond  a  question;  for 
such  and  so  rapid  is  the  accumulation  of  assets  that 
a  capital  however  large  becomes  insignificant  by 
comparison.  Adequate  premiums  mean  more  for  the 
strength  and  soliditj  of  the  company  than  would 
capital  stock,  which  might  soon  fall  into  designing 
hands  were  the  premiums  inadequate. 

The  desire  of  men  for  the  best  bargain  naturally 
tends  to  reduce  rates  to  the  lowest  possible  basis, 
without  reference  to  the  effect  upon  the  security  of 
the  company;  for  men  cannot  be  expected  to  act 
counter  to  what  appears  to  be  self  interest.  There- 
fore, the  logic  of  the  situation  requires  the  introduc- 
tion of  a  system  which  will  make  men  willing  to  pay 
adequate  premiums  and  thus  divert  competition  to 
some  other  direction.  By  adopting  the  mutual 
system   this  is    accomplished,   as  both  all  possible 


65 


guarantees  of  safety  are  thus  obtained  and  insurance 
is  furnished  at  the  lowest  possible  cost  notwith- 
standing. This  system  transfers  competition  from 
price  to  cost,  which  is  an  important  change,  inas- 
much as  it  means  care  and  caution  on  the  part  of  the 
companj^  furnishing  insurance  at  the  lowest  cost,  in- 
stead of  daring  or  desperation  on  the  part  of  the 
company  bidding  lowest  for  insurance  in  the  market. 

In  consequence  of  these  things,  the  mutual  system 
has  become  well  nigh  universal,  and  some  method  for 
properly  apportioning  the  profits  among  the  mem- 
bers is  required.  At  different  times  and  with  different 
companies,  various  methods  have  been  in  vogue;  and 
even  in  this  country  and  at  this  day  at  least  one 
large  company  employs  a  formula  which  is  a  mystery 
to  all  actuaries  and  which  produces  very  singular 
and  seemingly  contradictory  results.  The  original 
method  was  to  divide  the  surplus  into  bonuses  in 
proportion  to  the  premiums  paid;  in  some  cases  in 
proportion  to  the  current  premiums,  in  others  in  pro- 
portion to  the  sum-totals.  This  was  a  sort  of  rough 
justice,  reminding  one  of  the  administration  of  law 
on  the  frontier. 

The  inequities  of  the  prevailing  systems  became  ap- 
parent as  the  business  developed;  and  in  the  office  of 
the  Mutual  Life  Insurance  Company,  of  New  York,  a 
new  system  was  first  adopted  which  has  since  be- 
come almost  universal  in  this  country.  It  is  known 
as  the  contribution  plan  and  was  discovered  by 
Sheppard  Homans  and  David  Parks  Fackler,  then 
actuaries  of  the  Mutual.  The  central  thought  of  the 
plan  was,  as  the  name  implies,  to  distribute  the 
profits  pro  rata  as  they  had  been  contributed.    Aq- 


66 


cording  to  this,  gain  from  the  loading  would  be  dis- 
tributed in  proportion  to  the  amount  each  person 
paid  in  for  loading  purposes.  In  the  same  way  the 
gain  from  excess  interest  would  be  distributed  in  pro- 
portion to  the  amounts  of  the  policy  accumulations 
earning  interest.  At  the  time  this  plan  was  adopted 
this  meant  the  reserves  only,  because  accumulated 
surplus  plans  were  not  then  in  use.  At  the  present 
day,  when  such  plans  are  more  common  than  any 
other,  the  share  of  the  company's  assets  contributed 
by  the  policy  and  comprising  both  reserve  and  sur- 
plus should  be  this  factor  in  proportionate  distribu- 
tion of  surplus. 

The  gain  from  mortuary  sources  is  also  distributed 
according  to  amounts  contributed  to  pay  mortuary 
losses;  or,  rather,  according  to  the  amounts  which 
were  thought  to  be  required  to  pay  current  mortu- 
ary losses.  For  it  must  not  be  lost  sight  of  that  the 
entire  net  premiums  on  all  policies  for  the  whole 
period  of  life  are  contributed  to  pay  mortuary  losses. 

It  is  in  this  connection  that  the  partition  of  pre- 
miums into  so  called  expense,  mortality  and  deposit 
for  reserve  elements  comes  into  play  as  a  book- 
keeping convenience.  Of  course,  in  order  to  calculate 
the  proper  apportionment  of  gains  from  loading,  it 
is  necessary  to  know  the  amount  of  the  loading.  It 
is  also  necessary  to  know  the  amount  of  the  reserve 
in  order  to  calculate  its  due  share  of  surplus  interest, 
although  simpler  methods  might  be  adopted  in  the 
case  of  accumulated  surplus  policies.  To  know  the 
amount  of  current  deposits  for  reserve  is  in  no  sense 
requisite  and,  in  fact,  such  amounts  are  determined 
iust  because  the  separation  of  the  other  two  elements 
leaves  them  already  determined. 


67 


The  so-called  mortality  element,  or,  more  accu- 
rately, the  current  cost  of  insurance,  is  a  very  mis- 
leading item  to  many.  In  the  paper  next  preceding 
this,  it  was  shown  that  the  survival  of  a  man  or  so 
more  than  was  expected  in  a  given  year  does  not  imply 
the  gain  of  the  amount  of  their  policies,  since  they  must 
still  be  insured,  which  requires  the  present  reserves 
upon  their  policies  and  all  future  premiums.  There 
is  in  such  cases  no  great  gain  without  some  small  loss. 
That  rule  is  reversed  when  death  does  occur,  for  then 
the  compan3^  is  freed  from  the  obligation  to  continue 
the  insurance.  It  loses  the  amounts  of  the  policies  but 
gains  the  reserves;  or,  in  other  words,  its  net  loss  is 
the  amounts  of  the  policies  less  their  reserves.  It  fol- 
lows, therefore,  that  its  net  risk  is  the  sum  of  all  its 
policies  less  the  sum  of  all  its  reserves,  and  that  its 
risk  on  any  policy  for  any  year  is  the  amount  of  the 
policy  less  its  then  reserve.  It  follows  also  that  the 
table  cost  of  insurance  on  that  policy  for  the  current 
year  will  be  a  net  natural  premium,  not  for  the 
amount  of  the  policy,  but  instead  for  the  net  amount 
at  risk.  Since  the  cost  of  insurance  is  an  annual 
term  premium,  it  is  possible  to  calculate  upon  it  a 
gain  without  a  deduction  for  re-insurance.  Now  it 
is  plain  that  the  actual  cost  of  insurance  will  bear 
the  same  ratio  to  the  tabular  cost  as  the  actual 
death  losses  of  the  year  do  to  the  death  losses  ex- 
pected. Therefore,  the  total  actual  gain  will  be  the 
same  percentage  of  the  aggregate  tabular  cost  as  the 
total  apparent  gain  is  of  the  expected  loss.  That 
same  percentage  applied  to  the  tabular  cost  of  insur- 
ance on  each  policy  will  show  how  much  each  policy 
contributed  to    that    gain.     At  least,  that   is  the 


assumption  which  governs  this  method  of  distribu- 
tion and  it  is  for  the  most  part  justifiable,  though 
open  to  some  objections,  as  will  be  shown  hereafter. 
For  annual  or  frequent  distributions  of  surplus  it  is 
almost  beyond  question  that  the  contribution  plan 
does  each  person  exact  justice,  and  any  departure 
from  it  properly  excites  suspicion  of  discrimination. 


69 


SURPLUS— HOW  AND  WHEN  DISTRIBUTED. 

The  manner  in  which  the  surplus  earnings  should 
be  distributed  and  applied  has  been  from  the  begin- 
ning a  question  engaging  the  attention  of  the  ablest 
actuaries.  In  early  times,  and  even  until  our  own, 
the  current  of  practice  if  not  of  theory  was  toward 
reversionary  additions  to  the  policy,  or  the  furnish- 
ing of  as  much  more  permanent  insurance  as  the  sur- 
plus would  justify.  This  course  seemed  to  be  borne 
out  by  the  fact  that  the  insured  evidently  intended  to 
apply  his  money  to  the  purchase  of  insurance  and 
that,  consequently,  the  office  of  the  premium  was  to 
furnish  as  large  an  insurance  as  possible. 

Springing  from  the  practice,  and  especially  from 
that  line  of  reasoning,  came  the  plan  of  applying  the 
surplus  to  the  purchase  of  temporary  insurance,  thus 
increasing  the  immediate  protection  to  the  largest 
possible  amount.  This  plan,  just  to  the  extent  of  the 
temporary  insurance  thus  furnished,  became  a  com- 
petitor of  short  term  and  assessment  plans  in  point 
of  cheapness.  Unfortunately,  just  to  the  same  ex- 
tent, it  was  subject  to  the  objections  to  assessment 
insurance,  being  an  increasing  cost  contract.  It  was 
not  found  satisfactory. 

The  application  of  surplus  in  the  form  of  reversion- 
ary additions  of  a  permanent  character  of  course  in- 
creased the  reserve  values  of  the  policies,  or  the 
amount  that  would  be  required  to  reinsure  them. 


To 

This  is  clear,  since  the  new  company  would  have  to 
assume  a  larger  risk  at  the  former  premium.  For  a 
time  companies  did  not  report  the  values  of  these 
paid-up  additions  as  a  liability,  but  this  was  insisted 
upon  later  and  is  now  the  custom. 

Probably  one  reason,  if  not  the  principal  one,  for 
the  absence  of  these  items  from  the  reserve  calcula- 
tions was  the  fact  that  originally,  although  fully 
paid  for,  such  paid-up  additions  were  forfeited  with 
the  original  policy  upon  non-payment.  Therefore  it 
was  not  thought  fair  to  consider  the  same  paid-up 
insurance,  which  of  course  it  would  be  a  contradic- 
tion to  talk  of  lapsing.  It  did  not  follow  because  of 
that,  to  be  sure,  that  no  account  should  be  taken  of 
such  insurance  in  calculating  reserves,  since  insurance 
which  may  be  lost  is  not  on  that  score  already  out 
of  existence.  But  it  did  follow  that  such  paid-up 
additions  should  not  be  forfeited  with  the  original 
policy,  and  that  became  clear  to  every  one. 

A  recognition  of  the  insured's  rights  in  this  surplus 
accumulation  as  something  already  earned  and  not 
contingent  upon  future  action  carried  with  it  almost 
as  a  corollary  the  eventual  recognition  of  his  right 
to  dictate  what  was  to  be  done  with  it.  It  soon  be- 
came the  custom  to  permit  the  conversion  of  such 
reversions  into  their  net  cash  values,  either  by  a 
selection  of  cash  dividends  once  for  all,  or  by  the  priv- 
ilege of  an  option  when  the  surplus  was  declared,  or, 
in  more  liberal  companies,  by  the  continual  privilege 
of  conversion  at  any  time.  So  that  in  effect  the  in- 
sured became  absolute  arbiter  over  the  manner  in 
which  the  surplus  was  to  be  applied. 

On  the  part  of  actuaries,  so  long  as  reversions  only 


71 


were  allowed,  there  was  little  objection  to  the  plan; 
but  with  the  privilege  of  conversion  a  new  situation 
was  created.  The  presumption  was  that  healthy 
persons  would  take  cash  dividends  and  persons  in 
impaired  health  would  prefer  to  increase  their  insur- 
ance, thus  creating  a  selection  of  risks  adverse  to  the 
company.  This  presumption,  though  backed  up  by 
no  statistics,  seemed  unassailable  and  stubbornly 
continues  until  this  day,  because  apparently  in  line 
with  common  sense.  To  assume  that  common  sense 
will  govern  is,  however,  perhaps  too  bold  an 
assumption,  and  doubtless  therein  lies  the  ex- 
planation of  the  discrepancy  between  theory  and 
statistics. 

In  any  event,  the  result  of  this  actuarial  theory 
was  to  cause  a  complete  revulsion  of  practice  from 
reversions  with  the  privilege  of  cash  conversions  to 
cash  dividends  with  the  privilege  of  dividend  addi- 
tions instead,  but  subject  to  proof  of  good  health  in 
most  cases.  Such  became  the  almost  universal  prac- 
tice, the  cash  dividends  being  commonly  used  in  re- 
duction of  premiums  and  only  payable  in  case  the 
new  premium  is  paid,  although  such  dividend  is  al- 
ready earned  and  in  fact  a  direct  outgrowth  of  pre- 
miums already  paid. 

Other  methods  of  applying  the  surplus  were  as  short 
term  and  permanent  reductions  of  the  premium.  The 
latter  amounted  to  the  purchase  of  single  premium 
annuity  for  life  with  the  net  cash  surplus,  such  an- 
nuity available  only  in  payment  of  future  premiums. 
The  absolute  title  to  the  reserve  value  of  such  annui- 
ties was  not  conceded  to  the  policyholder,  the  same 
being    forfeited  upon  non-payment  of  premiums,  as 


72 


was  originally  true  of  reversionary  additions.  This 
method  never  became  in  any  sense  popular  in  this 
country. 

Some  companies,  which  divided  surplus  at  periods 
longer  than  one  year,  hit  upon  the  idea  of  distribut- 
ing its  payment  over  the  succeeding  period,  thus 
making  a  level  premium  for  the  period  and  also  pre- 
venting sudden  depletion  of  the  funds  of  the  com- 
pany. Like  all  other  methods,  this  had  plausible 
features;  but  the  companies  practicing  it  usually" 
treated  the  surplus  as  something  only  earned  as  it 
was  paid  and  forfeitable  at  any  time  upon  non-pay- 
ment of  premium.  It  is  difficult  to  see  wherein  it 
diftered  except  in  name  from  annual  dividends  de- 
ferred the  same  number  of  years. 

The  practice  of  deferring  the  payment  of  dividends 
for  several  years  after  the  beginning  of  the  policy 
was  an  early  one  and  justified  by  better  reasons  than 
are  usually  put  forth  in  defense  of  life  insurance  pro- 
cedure. The  theory  of  surplus  division  is,  and 
the  practice  ought  to  be,  that  all  profits  are  di- 
vided without  reservation.  But  if  such  a  division  is 
to  be  made  after  the  first  year,  it  is  evident  that  the 
company  will  have  no  considerable  margin  between 
itself  and  insolvency.  The  fairer  and  better  course, 
whereby  to  avoid  this  undesirable  condition,  would 
seem  to  be  to  withhold  for  a  certain  time  the  pay- 
ment of  dividends  from  every  policy,  thus  compelling 
each  in  turn  to  contribute  to  the  general  surplus. 
This  would  only  defer  the  payment  of  the  entire  ^ut^ 
plus,  which  would  all  be  accounted  for  at  or  after  the 
termination  of  the  policy.  It  is  perhaps  unnecessary 
to  say  that  many  companies  forgot  to  thus  account 


73 


for  it,  some  even  in  event  of  termination  by  death  or 
maturity  and  nearly  all  in  event  of  termination  by 
lapse  or  surrender. 

The  shortening  of  the  time  during  which  |the  pay- 
ment of  dividends  was  deferred  was  not  occasioned 
so  much  by  any  of  these  cogent  considerations  as  by 
the  clamor  for  lower  premiums  on  the  part  of  the 
public.  In  order  to  avoid  granting  the  popular  de- 
mand many  companies  preferred  to  put  forth  a  par- 
tial loan  plan,  whereby  the  insured  could  from  the 
start  avoid  paying  the  whole  premium.  Such  loans 
were  made  for  a  proportion  of  the  premiums  fully 
equal  to  the  expected  dividends  and  it  was  repre- 
sented that  the  dividends  would  soon  wipe  them  out. 
This  plan  had  indeed  the  opposite  effect  to  that  of 
the  former  systems,  inasmuch  as  the  person  who 
availed  himself  of  the  loan  and  soon  discontin- 
ued had  the  benefit  of  the  reduction,  while  he  who 
paid  full  premiums  and  discontinued  had  no  corre- 
sponding advantage. 

Taking  to  such  expedients  did  not  stem  the  tide  of 
the  public  demand,  which  was  at  last  Janswered  by 
reducing  the  term  during  which  the  payment  of  divi- 
dends was  delayed  to  not  longer  than  two  years.  In 
most  companies,  in  fact,  the  term  was  shortened  to 
one  year,  a  dividend  being  given  as  soon  as  earned 
and  determined.  In  order  to  carry  a  current  surplus 
under  this  plan  it  was  necessary  to  resort  to  the  plan 
of  not  dividing  the  total  actual  earnings,  but  only  so 
much  thereof  as  seemed  judicious  to  the  managers — 
a  most  dangerous  custom,  as  both  theory  and  facts 
abundantly  attest. 

Singularly  enough,  the  changes  which  take  place  in 


74 

almost  all  businesses  do  not  appear  to  be  otherwise 
than  adventitious  and  accidental.  Yet  beneath  the 
surface  it  is  possible  to  trace  a  slow  evolution  directed 
by  causes  unknown  to  the  persons  who  seem  to  be 
the  leaders  in  the  new  methods.  This  has  been  pecu- 
liarly true  of  life  insurance,  which  has  advanced  in 
most  cases  along  unexpected  lines  and  not  only  with- 
out the  aid  of  the  great  actuaries,  but  even  against 
their  earnest  opposition.  The  most  striking  excep- 
tion to  this  general  statement  is  the  work  of  the  re- 
nowned Elizur  Wright,  who  combined  in  himself  the 
skill  of  a  mathematician  and  the  hard  sense  of  a  man 
of  affairs. 

But  conforming  to  the  usual  trend,  the  change 
which  has  of  late  years  taken  place  in  the  matter  of 
dividend  periods  was  occasioned  by  something  en- 
tirely foreign  to  that  which  has  made  it  popular. 
The  fall  of  dividends  below  the  expectations  of  the 
insured  had  previous  to  1870  prepared  the  public  for 
a  change  to  a  plan  where  the  net  annual  expenditure 
would  not  vary.  Non-forfeiture  was  yet  too  new  to 
be  appreciated  and  by  many  was  considered  a  prime 
cause  of  the  low  dividends.  The  time  was  ripe  for  a 
change  from  old  methods  and  the  tontine  plan  of 
dividends  deferred  for  long  terms  was  launched.  The 
crisis,  and  the  attendant  falling  off  of  the  insurance 
in  force  because  of  lapse  and  surrender,  served  to 
bring  the  so-called  profit  from  lapses  into  undue 
prominence — undue  because  the  lapse  experience  was 
totally  abnormal  and,  it  is  to  be  hoped,  not  soon  to 
be  experienced  again. 

Such  should  not  have  been  the  case  and,  from  the 
recent  popularity  of  non-forfeiture  plans,  it  is  clear 


75 


that  such  was  not  the  real  cause  of  the  general  favor 
for  the  new  plans.  The  true  secret  of  their  success 
was  the  long  dividend  period,  which  at  the  same  time 
silenced  the  demand  for  immediate  cheapness  and 
aroused  expectations  of  eventual  gain.  The  mere 
length  of  the  dividend  period  was  the  real  point  of 
attraction;  the  other  features  were  merely  accidental 
and  transitional  and  are  already  in  process  of  rapid 
elimination.  Traditions  of  the  past  and  its  methods 
are  3^et  too  strong  to  be  fully  shaken  oflf  and  in  conse- 
quence there  is  yet  talk  of  "lapse-profits"  and — most 
comical  of  all  things — "loss-profits."  But  the  current 
has  set  in  for  sim  pier  and  more  straight-forward  meth- 
ods, less  involved  in  mystery.  Of  all  the  features  once 
considered  essential  to  tontine  but  one  seems  likely 
to  last  and  that  is  the  long  dividend  period,  which, 
had  it  been  unaccompanied  with  taking  features 
when  proposed,  would  have  had  a  hard  road  to 
travel  to  reach  popular  favor. 

The  hardships  of  forfeiture,  once  enforced  against 
policyholders  under  this  plan,  have  long  ago  been 
avoided.  Of  course,  as  no  dividend  is  declared  until 
the  close  of  the  period,  no  dividend  is  given  to  policies 
surrendered  before  that  time.  But  even  that  appar- 
ent hardship  is  now-a-days  mitigated  by  a  larger 
surrender  value  in  many  companies  than  would 
otherwise  be  deemed  safe  and  proper.  The  tide  of 
progress  is  set  in  that  direction  in  answer  to  an  un- 
mistakable public  demand. 

No  such  demand  exists  for  the  relaxation  of  the 
forfeiture  of  claims  to  surplus  upon  the  death  of  the 
insured.  The  impression  seems  to  prevail  that  insur- 
ance is  cheap  enough  to  those  who  die  soon  and  that 


the  true  problem  is  to  make  it  cheap  to  those  who 
live  long.  The  absence  of  any  such  protest  is  signifi- 
cant, determining  in  fact  the  central  idea  and  work- 
ing principle  of  a  long  dividend  period,  namely:  That 
to  survivors  only  belong  the  surplus,  for  they  only 
have  contributed  it.  The  same  logic  which  has  made 
the  contribution  plan  of  apportioning  surplus  the 
only  possible  one  is  relentlessly  comiDclling  the 
adoption  of  long  surplus  periods. 

The  traditional  methods  of  calculating  surplus  and 
the  considering  tontine  surplus  a  mere  accumulation 
of  annual  dividends  obscure  the  matter  somewhat. 
But  the  true  tontine  plan  involves  the  following:  The 
accumulation  of  the  actual  premiums  at  the  actual 
interest  rate  of  the  company,  deducting  from  time  to 
time  the  policy's  share  of  expenses  and  gross  losses 
and  adding  its  share  of  any  offsets,  such  as  the  funds 
accumulated  upon  policies  matured  by  death  or  the 
actual  surrender  charges  against  the  funds  of  policies 
surrendered.  A  proper  method  of  book-keeping 
should  show  the  account  clearly  from  year  to  year 
and  would  contrast  sharply  with  the  cumbrous  and 
involved  methods  now  in  use. 

As  the  tendency  of  the  times  is  toward  longer  divi- 
dend periods,  so  is  it  also  in  the  direction  of  greater 
freedom  for  the  policyholder  in  the  matter  of  the  ap- 
plication of  surplus.  As  the  periods  do  not  frequently 
recur,  the  actuaries  do  not  seem  to  have  the  same 
fear  of  adverse  selection  as  in  the  case  of  annual  divi- 
dend policies.  Consequently,  the  greatest  latitude  is 
permitted  in  optional  disposition  of  the  surplus, 
with  the  exception  that  in  case  the  amount  at  risk  is 
increased  a  new  examination  is  usually  required. 


77 


Certain  improvements,  scarcely  yet  begun,  may  soon 
be  expected  in  this  direction;  for  it  has  been  the  usage 
of  companies  to  treat  tontine  policyholders  quite  dif- 
ferently from  some  others  in  the  matter  of  the  single 
premiums  charged  at  the  close  of  dividend  periods 
for  life  insurance  or  life  annuities.  If  the  insured 
chose  to  apply  his  fund  to  the  purchase  of  paid-up  in- 
surance, it  has  been  the  custom  to  exact  for  a  non- 
participating  policy  the  premium  a  new  applicant 
v^ould  pay  for  a  participating  policy.  Indeed,  the 
rates  of  single  premiums  were  raised  at  a  time  suspi- 
ciously near  the  termination  of  the  first  tontine 
periods.  Quite  contrary  to  this  is  the  treatment 
accorded  the  holders  of  limited-payment  life  policies, 
whose  contracts  really  consist  of,  first,  a  partial  en- 
dowment equal  to  the  net  single  premium  of  a  life 
policy  at  the  age  attained  at  the  close  of  premium- 
paying  period,  and,  second,  the  purchase  of  a  paid- 
up  life  polic3^  with  the  proceeds  of  that  endowment. 
That  life  policy  is  sold  at  the  net  premium,  and  yet 
participates,  while  from  the  proceeds  of  a  tontine 
policy  a  loaded  premium  is  exacted  without  partici- 
pation. This  is  manifestly  unfair  and  out  of  place  in 
a  mutual  system.  The  same  condition  of  affairs  is 
found  in  the  case  of  an  annuity,  except  as  to  partici- 
pation. A  deferred  annuity  contract  consists  of  two 
separable  contracts,  namely:  a  partial  endowment 
for  an  amount  equal  to  the  net  single  premium  of  the 
desired  annuity  at  the  age  attained  at  the  close  of 
the  premium-paying  period,  and  the  purchase  with 
the  proceeds  of  such  endowment  of  an  annuity  at  the 
net  single  premium  then  required.  Contrariwise,  a 
loaded  premium  is  charged  when  the  proceeds  of  a 
tontine  policy  is  the  purchasing  medium. 


78 


In  justification  of  these  unjust  distinctions  the  dan- 
ger of  higher  reserve  requirements  is  often  urged  and 
seemingly  with  some  cogency.  But  in  the  first  place 
the  same  argument  would  apply  with  even  greater 
force  to  limited  payment  life  and  deferred  annuity 
policies;  for  not  only  is  the  net  rate  used,  but  the 
table  and  interest  on  which  that  rate  is  computed  is 
settled  in  advance  and,  dividends  being  payable  an- 
nually, there  would  be  no  apparent  means  of  making 
good  any  deficit  in  reserves.  There  seems  to  be  no 
just  reason  why  the  single  premiums  should  not  be 
fixed  at  figures  unquestionably  safe  and  then  em- 
ployed in  both  and  in  all  cases,  except,  perhaps,  the 
purchase  of  new  insurance  under  new  policies. 

Long  dividend  periods  render  companies  safer  by 
the  accumulation  of  a  large  surplus;  avoid  the  neces- 
sity of  leaving  a  portion  of  the  surplus  contributed 
by  a  policy  undeclared  from  year  to  year  in  order  to 
make  a  vsrorking  surplus;  avoid  the  possibility  of 
paying  a  dividend  which  future  experience  will  show 
never  to  have  been  earned;  avoid  the  payment  of 
profits  to  persons  who  by  early  death  contribute  a 
loss  and  not  a  profit;  enable  a  company  to  contract 
for  more  liberal  and  definite  surrender  values  with- 
out prejudice  to  other  interests;  enable  a  company  tQ 
meet  the  increased  reserves  under  any  future  regula- 
tion from  one's  own  fund  instead  of  a  mysterious 
"general  surplus";  render  to  each  of  the  actual  con- 
tributors of  surplus  and  reserve  his  exact  share  of 
the  whole,  and  make  it  possible  for  a  wide  liberty  of 
choice  to  be  granted  the  insured  in  the  use  of  his  fund 
without  danger  to  the  company  or  damage  to 
others. 


79 


EXPENSES-HOW  ASSESSED. 

Little  effort  has  been  made  by  actuaries  to  place 
the  assessment  of  expenses  upon  a  scientific  and 
therefore  just  basis.  The  office  of  actuary,  in  this 
country  at  least,  has  been  to  furnish  a  safe  estimate 
of  net  rates  required  and  leave  the  rest  to  business 
managers.  English  actuaries  have  usually  had  a 
broader  field  of  activity,  being  in  fact  the  responsi- 
ble managers  as  well.  But  in  both  countries  few 
endeavors  to  adjust  the  expense  charges  on  a  scien- 
tific basis  have  been  made.  On  the  contrary,  as  has 
been  mentioned  in  earlier  papers  of  this  book,  the 
actuary  then  in  highest  esteem  in  England  as  late  as 
1860  gravely  tested  the  solvency  of  a  company  on  the 
assumption  that  it  would  have  no  expenses  whatever 
and  that  therefore  its  gross  premiums  would  be 
available  without  deduction  to  pay  losses.  In  such 
an  assumption  he  had  the  support  of  a  learned  pro- 
fessor in  Yale  and  other  great  mathematicians.  In 
the  light  of  that  so  recent  occurrence  it  is  not  singu- 
lar that  no  very  determined  attempt  to  solve  the 
problem  of  assessing  expenses  has  been  made.  The 
entire  subject  was  until  of  late  considered  beneath 
the  notice  of  scientific  men. 

The  custom  came  to  be  to  reckon  the  expenses  in 
proportion  to  the  premium  as  the  most  convenient 
method,  making  no  distinction  as  to  kinds  of  policies. 
This  practice,  modified  in  most  companies 'because  of 


80 


the  necessity  of  furnishing  endowment  insurance  art  a 
rate  within  reason,  prevails  to  this  day.  Of  course 
any  variation,  however,  compels  a  surrender  of  the 
rule  of  percentage  upon  the  premiums.  The  varia- 
tions are  all  accommodated  by  a  method  which  is  not 
a  wide  departure  from  the  premium-percentage 
system.  This  method  starts  by  considering  the  load- 
ing as  an  ** expense  element"  according  to  the 
phraseology  of  some  or,  in  other  words,  all  available 
for  expense  purposes.  Accordingly  the  sum  of  the 
margins  of  '' loading '^  is  considered  the  assumed  ex- 
pense and  forms  a  fund.  The  amount  remaining  in 
this  fund  at  the  close  of  the  fiscal  year  is  rebated  to 
the  policies  in  proportion  to  their  contribution  to  the 
fund.  In  effect,  this  is  charging  the  actual  expenses 
as  a  percentage  of  the  loading,  which,  when  the  load- 
ing bears  the  same  proportion  to  the  premium,  what- 
ever be  the  form  of  policy,  is  exactly  equivalent  to 
the  premium-percentage  method,  but  not  otherwise. 
It  has  already  been  pointed  out  in  a  previous  paper 
that  the  loading  is  not  an  ' 'expense  element"  but  a 
provision  for  any  and  all  contingencies.  Among  the 
exigencies  it  is  meant  to  meet  are  the  decline  of  inter- 
est and  consequent  increased  reserve  requirements, 
unexpected  shrinkage  in  value  of  assets,  financial 
losses  and  excessive  mortality  experience.  The  first 
of  these  contingencies  has  already  come  to  all  our 
companies  once  at  least  and  each  of  the  others  to 
some  company.  If  the  whole  loading  is  to  be  availa- 
ble for  expenses,  it  follows  that  no  provision  is  made 
for  any  of  these  contingencies.  What  is  to  bethought 
of  those  sadly  numerous  cases  where  the  actual  ex- 
pense exceeds  the  so-called  expense  fund  is  a  question. 


81 

The  attention  of  actuaries  has  of  late  been  called  to 
the  subject  of  expense  apportionment  by  the  pressure 
of  companies  upon  the  expense  funds  in  their  race  for 
new  business.  The  brokerage  system,  which  means 
the  outlay  of  much  more  than  the  loading  on  a  first 
premium  to  secure  the  same,  has  involved  the  prob- 
lem, inasmuch  as  there  seemed  to  be  a  manifest 
unfairness  when  other  and  older  policies  were  called 
on  to  meet  the  deficit.  Schemes  to  overcome  this 
difficulty  have  been  much  discussed,  but  it  is  probable, 
judging  from  events,  that  the  problem  will  disappear 
with  the  brokerage  system  itself.  The  impossibility 
of  indefinitely  extending  business  under  that  system, 
and  especially  of  launching  a  new  company  with 
prospects  for  immediate  success,  has  impelled  many 
to  search  earnestly  for  some  means  to  circumvent 
this  stumbling-block. 

The  collection  of  a  larger  amount  for  expenses  at 
higher  than  at  lower  ages,  thus  emphasizing  the  dis- 
advantage of  age,  was  some  time  ago  recognized  as 
a  wrong.  Sheppard  Homan,  the  eminent  actuary, 
discarded  that  method  in  the  construction  of  his 
peculiar  yearly-term  rates.  He  added  a  loading  for 
other  purposes  to  the  net  premium  by  a  percentage 
plan,  but  made  his  expense  charge  a  definite  sum  per 
thousand  of  insurance  at  all  ages.  The  same  rule 
was  not  applied  by  him  to  other  plans,  I  believe,  and 
even  on  that  plan  does  not  apply  to  the  first  year's  pre- 
mium, in  which  all  above  the  net  premium  is  considered 
available  for  expenses.  His  method  has  lately  been 
adopted,  I  understand,  by  the  New  England  Mutual 
and  by  it  applied  to  all  policies  of  whatsoever  form, 
so  far  at  least  as  first-year's  commissions   are  con- 

^  OF  THE 

UNIVERSITY 


cerned.  No  alteration  of  the  loading  has  been  an- 
nounced, however,  and  it  is  by  no  means  certain  that 
a  radical  change  in  that  regard  is  intended. 

It  is  in  any  case  an  error  to  suppose  that  such  is 
the  most  important  reform  in  the  matter  of  expense 
assessment.  It  is  not  clear  that  there  is  any  real  in- 
justice in  charging  a  larger  expense  against  a  large 
premium  than  a  small  one,  especially  when  the  whole 
premium  is  intended  for  mortality  purposes.  If  such 
is  unjust,  the  injustice  is  common  to  all  commission 
businesses  and  to  all  forms  of  insurance.  So  far  as 
pure  insurance  is  concerned,  there  seems  to  be  no 
argument  of  convincing  force  against  the  system  of 
premium-percentage.  It  is  worthy  of  remark,  how- 
ever, in  this  connection  that  no  good  reason  appears 
for  assessing  expenses  other  than  initial  commissions 
and  other  expenditure  of  that  nature  against  a  new 
single  premium  and  at  the  same  time  absolving  an 
old  one  from  all  contribution.  Just  how  the  ex- 
penses of  a  company  whose  policies  were  all  pai'd-up 
would  be  met  is,  indeed,  an  enigma. 

But  while  it  is  not  probable  that  a  percentage  con- 
tribution would  be  any  more  objectionable  on  a 
purely  life  premium  than  on  a  fire  or  accident  pre- 
mium, experience  has  clearly  shown  that  there  is  a 
strenuous  though  not  often  conscious  objection  to 
the  application  of  that  system  to  the  premiums  of 
policies  which  are  largely  investmeiit  in  character. 
The  fact  of  such  objection  was  provocative  of  the 
variation  from  the  percentage  system  already  men- 
tioned, and  the  failure  of  the  popularity  originally 
expected  for  endowment  insurance  can  be  largely 
traced  to  the  popular  impression  that  the  premiums 


83 


are  too  high.  This  is  only  another  way  of  saying 
that  too  large  a  portion  of  the  premium  is  to  be  ex- 
pended, for  otherwise  the  maturity  value  would  be 
the  greater  for  the  big  premium. 

Men  will  pay  a  reasonable  sum  for  life  insurance 
expenses  when  they  desire  insurance,  even  as  they  pay 
a  sum  not  always  reasonable  for  expenses  when  they 
purchase  other  insurance.  But  few  men  would  know- 
ingly pay  twenty-five  dollars  per  annum  for  the 
privilege  ot  investing  seventy-five.  When  they  do  it 
without  knowing  it,  they  not  infrequently  feel  that 
they  have  been  duped,  and  many  look  with  suspicion 
upon  the  mysterious  unwillingness  to  guarantee 
much. 

In  instance,  the  loading  on  a  life  premium  at  age  30 
is  in  many  companies  $7.09  per  $1,000  of  insurance. 
The  loading  on  a  limited  payment  life  policy  is  not 
proportionately  so  large,  for  which  departure  no 
good  reason  can  be  given.  The  method  in  vogue  for 
assessing  expenses  against  this  policy  is,  however,  to 
treat  the  entire  loading  as  an  assumed  ''expense  ele- 
ment" for  current  use  and  to  hold  no  margin  for 
expenses  after  the  policy  becomes  full-paid.  So  long 
as  this  is  the  case,  no  tears  need  be  shed  over  the 
apparent  inequality.  The  loading  in  the  same  com- 
panies on  a  twenty-year  endowment  premium  is 
$11.86  per  $1,000  of  insurance,  although  the  pre- 
mium provides  only  for  term  insurance,  upon  vrhich 
the  loading  would  usually  be  about  $4.00.  All 
above  that  amount  the  policyholder  is  paying,  not 
for  expense  in  taking  care  of  insurance,  but  for  ex- 
pense in  taking  care  of  money.  In  the  total  premium 
he  is  paying  more  by  far  for  expenses  and  mortality 


84 


than  the  holder  of  a  life  policy,  taking  into  account 
the  reserve  value  of  both  policies  at  the  end  of  twenty 
years.  This  operates  as  a  handicap  to  his  investment 
and  makes  it  to  his  interest  to  purchase  insurance  on 
life  plans  and  invest  elsewhere.  Such  should  not  be 
the  case,  as  the  life  insurance  company  has  a  distinct 
advantage  over  other  channels  of  investment  in  the 
fact  that  it  becomes  a  hedge  against  the  chances 
of  death  and  that,  as  survivors  only  receive  the 
investment,  the  desired  amount  may  be  accumulated 
at  less  annual  outlay  than  by  other  means.  As  was 
explained  in  the  papers  on  rate-making,  the  net  en- 
dowment premium  consists,  not  of  a  term  premium 
and  an  installment  sufficient  to  amount  at  4  per  cent 
to  the  face  of  the  policy,  but  of  a  term  premium  and 
an  installment  considerably  smaller  than  the  other, 
being  a  net  simple  endowment  premium.  The  advan- 
tage of  endowment  insurance  over  term  insurance 
combined  with  other  investments  is  that  a  smaller 
installment  is  required.  That  advantage  is  more 
than  equalized  by  the  larger  amount  of  expenses 
taxed  against  endowment  premiums. 

The  endowment  premiums  of  one  large  company  are 
lower  than  those  of  many  others;  and  that  fact  in 
connection  with  a  puzzling  method  of  dividend  ap- 
portionment leads  me  to  conclude  that  the  company 
has  adopted  a  more  intelligent  treatment  of  expense 
'distribution.  What  it  is  the  company  has  not  seen 
fit  to  make  public.  It  is  clear,  however,  that  the 
proper  thing  would  be  to  make  a  very  sharp  distinc- 
tion between  premiums  intended  for  actual  insurance 
and  premiums  intended  for  investment  in  pure  en- 
dowments.   Whether  paid  in  one  premium  or  many, 


85 

life  policies  should  bear  their  due  proportion  of  ex- 
penses; and,  while  not  strictly  equal,  it  is  not  greatly- 
amiss  that  the  contribution  should  be  proportionate 
to  net  premium.  But  provision  should  be  made  in 
the  part  of  the  loading  intended  for  expenses,  not 
merely  for  present  outlay  but  for  future  demands  as 
well;  and  present  extravagance  should  thus  be 
curbed.  Endowment  policies  should  not  be  charged 
for  insurance  expenses  more  at  most  than  is  exacted 
from  a  life  policy  for  equal  amount  taken  at  same 
age.  Endowment  or  pure  investment  expenses, 
which  should  be  very  low,  can  best  be  provided  for 
by  making  the  interest  and  mortality  calculations 
low  enough  to  leave  a  sure  margin. 


SURRENDER  VALUES.— PAID-UP  INSURANCE. 

In  the  beginning,  and  for  a  very  long  time,  the  in- 
sured was  held  to  divest  himself  of  all  rights  under 
his  contract  by  failure  to  pay  premiums  when  due. 
This  regulation  was  strictly  enforced,  leaving  the 
insured  even  without  the  privilege  of  reinstatement, 
especially  if  in  impaired  health.  If  readmitted  to  the 
benefits  of  his  policy,  it  was  considered  a  matter  of 
grace  and  not  of  right.  All  pleas  for  consideration 
were  dismissed  with  the  retort  '*It  is  all  your  own 
fault,"  unless  it  was  clearly  to  the  advantage  of  the 
company  to  permit  a  reinstatement.  This  was  not 
thought  so  great  a  hardship  in  the  days  when  ordin- 
ary life  insurance  was  practically  the  only  form  in  use. 
The  nature  of  a  whole  life  policy  was  not  at  all  under- 
stood outside  of  strictly  actuarial  circles.  It  was  by 
no  means  generally  known  that  a  life  policy  neces- 
sarily involved  the  accumulation  of  money  from  the 
premiums.  It  was  easy  to  reason  by  analogy  from 
fire  and  marine  insurance  that  of  course  no  insurance 
could  be  given  unless  premiums  were  paid.  The  large 
assets  of  life  companies  were  thought  to  be  unneces- 
sary and  of  the  nature  of  surplus.  Although  a 
certain  degree  of  reason  was  conceded  to  govern  the 
practice  of  charging  an  older  man  more  than  a 
younger  one,  the  fact  that  the  premiums  did  not  in- 
crease with  age  seemed  mysterious  and  in  fact  ren- 
dered the  first  assertion  dubious.    Even  to  this  day 


87 

the  life  insurance  reserve  is  a  riddle  to  many  men  if 
not  to  most  men.  The  doubt  occasioned  by  so  many 
apparently  conflicting  things  flowered  eventually  in 
the  roseate  schemes  of  assessmentism. 

So  long  as  whole  life  contracts  were  uppermost  in 
the  public  mind,  the  chief  complaint  against  compa- 
nies in  the  matter  of  default  in  payment  of  premium 
was  caused  by  their  refusals  to  accept  the  premiums 
though  overdue.  Aside  from  the  comparatively  rare 
cases  when  the  insured  v^as  nigh  unto  death,  it  was 
thought  unfair  that  the  insured  should,  though  yet 
in  good  health,  be  compelled  to  pay  a  higher  premium 
than  before  because  of  advanced  age.  This  damage 
because  of  the  forfeiture  condition  was  measured 
therefore  by  the  diflerence  between  the  premium  he 
was  paying  before  and  the  premium  required  at  the 
new  age.  This,  even  though  his  health  conditions 
admitted  of  his  obtaining  new  insurance.  In  a  dull 
way  men  came  to  realize  that  they  were  wronged, 
feeling  a  sense  of  injury  but  not  altogether  compre- 
hending it,  nor  v^hat  the  company  gained  by  inflict- 
ing it,  which  was  in  fact  the  value  of  an  annuity  upon 
the  insured  life  equal  to  the  difference  mentioned. 

The  mutual  S3^stem  marked  the  beginning  of  a 
concession  of  rights  to  the  insured  after  he  had 
parted  with  his  premiums.  But  although  it  seemed 
easy  for  men  to  understand  that  they  had  an  interest 
ill  whatever  v/as  left  of  their  premiums  after  providing 
for  all  things  necessary  to  safe  insurance,  or,  in  other 
words,  in  the  surplus,  it  was  still  diflRcult  for  them  to 
realize  what  their  rights  were  in  the  matter  of  re- 
serve. Upon  surrender,  in  fact,  the  companies  held 
the  insured  to  have  forfeited  his  right  to  any  interest 


88 


whatever,  even  to  surplus  already  earned  and  appor- 
tioned. Such  indifference  to  men's  plain  rights  natur- 
ally indicated  but  little  hope  of  a  wider  recognition  of 
their  claims  in  matters  less  clearly  understood. 

Events,  apparently  entirely  disconnected,  forced 
upon  the  companies  a  departure  from  the  system  of 
forfeiture.  First,  in  the  order  of  time  and  primary 
importance  as  well,  was  the  introduction  of  limited- 
payment  life  and  endowment  policies.  These  policies 
by  their  very  names  and  natures  implied  a  some  time 
cessation  of  payments  and  apaid-up  ownership..  To 
be  evicted  entirely  from  this  ownership  upon  failure 
to  pay  later  premiums  was  too  evident  an  injustice  to 
pass  unchallenged.  No  analogy  could  exist  between 
such  contracts  and  fire  insurance;  they  resembled  the 
purchase  of  property  on  partial  payments  instead. 
The  demand  for  fair  treatment  became  too  pro- 
nounced to  overlook  and  had  to  be  met  in  some  way. 
It  became,  in  short,  a  question  between  giving  up 
the  new  and  most  popular  plans  or  conceding  some- 
thing to  the  general  call  for  fair  treatment. 

In  fact,  at  about  that  time  a  general  blaze  of  dis- 
satisfaction sprang  up  in  all  parts  of  this  country 
and  England  as  well.  Abroad  the  outrageous  disre- 
gard of  common  honesty  on  the  part  of  insurance 
managers  called  forth  one  of  Charles  Dickens'  most 
severe  satires.  There  it  resulted  in  legislation  to 
regulate  the  various  companies  and  societies  of  the 
realm.  In  this  country  it  fortunately  culminated  in 
more  severe  and  careful  examination,  particularly  in 
the  State  of  Massachusetts  and  under  the  direction 
of  Elizur  Wright.  One  result  of  this  investigation 
was  legislation  upon  this  and  many  correlated  sub- 


89 


jects  in  several  States;  but  a  more  important  result 
was  the  general  understanding  of  the  people  that 
they  had  rights  and  interests.  This  was  in  the  end 
tantamount  to  the  granting  of  their  demands  or  the 
failure  of  insurance  forever.  The  compulsion  of  law, 
in  itself  but  an  expression  of  the  people's  desire,  has 
not  proven  so  efficacious  as  the  demand  itself. 

Theodore  M.  Banta,  who  has  since  obtained  wide 
celebrity  because  of  his  courageous  exposure  of  the 
maladministration  of  William  H.  Beers,  president  of 
his  company,  is  credited  with  having  moved  the  New 
York  lyife  Insurance  Company  to  adopt  non-forfeiture 
provisions  in  the  ten-payment  life  policies  then  issued 
by  the  company,  thus  becoming  the  pioneer  in  that 
respect.  After  two  or  more  payments  had  been 
made,  these  policies  could  be  exchanged  for  paid-up 
policies  for  as  many  tenths  the  original  amount  as 
annual  premiums  actually  paid.  The  initiative  was 
shortly  followed  by  nearly  all  companies  and  compe- 
tition in  that  regard  raged  for  several  years.  This 
competition  was  checked  by  the  reactionary  tontine 
movement,  which  received  a  great  impetus  by  the 
number  of  lapses  from  1873  to  1878,  the  dread  of 
extinction  on  the  part  of  companies,  and  the  hope 
of  gain  on  the  part  of  insurers.  The  check  was  but 
temporary,  however,  and  partial;  by  1882  the  cur- 
rent was  again  flowing  uninterruptedly  in  the  other 
direction,  tontine  giving  way  to  semi-tontine  with 
non-forfeiture  conditions. 

There  was  great  variety  in  the  methods  of  meeting 
the  popular  demand.  In  the  case  of  limited-payment 
life  and  endowment  insurance,  the  course  indicated 
by  the  New  York  Life  was  generally  followed.   While 


90 


not  really  exact  justice,  there  was  an  apparent  fair- 
ness about  the  method  which  satisfied  the  public  for 
the  time  at  least.  But  the  problem  was  more  complex 
in  the  case  of  other  policies,  and  ordinary  life  policies 
were  by  no  means  least  troublesome. 

The  simplest  and  certainly  the  fairest  course  would 
have  been  to  apply  the  net  difference  between  the 
premium  of  the  policy  and  the  premium  which  would 
be  charged  at  the  present  age  to  purchase  frac- 
tional insurance  at  the  premium  at  the  present 
age.  In  instance,  the  paid-up  insurance  granted 
at  age  40  on  a  policy  issued  at  30  would  be 
determined  as  follows:  Premium  at  age  40, 
$32.20;  at  age  30,  $23.30;  the  difference  $8.90  a 
year,  which  at  $32.20  per  $1,000  insurance  will  pur- 
chase about  $276.40  insurance.  The  same  result  will 
be  reached  by  applying  the  difference  between  the  net 
premiums  to  purchase  insurance  at  the  net  pre- 
mium at  the  present  age,  or  by  the  circumlocutory 
method  of  finding  the  present  value  of  an  annuity 
equal  to  the  difference  between  the  premiums  and 
applying  it  as  a  net  single  premium  to  the  purchase 
of  insurance.  These  methods  are  equivalent  and  give 
the  same  results,  but  the  last  and  most  involved 
of  the  three  is  the  one  in  common  use.  Perhaps 
its  use  is  explained  by  the  altogether  too  common 
custom  of  applying  the  present  value  of  an  an- 
nuity equal  to  the  difference  between  the  net 
premiums  to  purchase  insurance  at  ''the  pub- 
lished rates  of  the  company"  or  the  gross  single  pre- 
mium at  the  age  attained.  This  is  equivalent  to. 
using  the  difference  between  the  net  premiums  to  pur- 
chase insurance  at  the  gross  premium.    In  instance, 


91 


the  net  premium  at  age  40  (actuaries  4  per  cent)  is 
$23.68;at  age  30, $16.97;  the  difference  being$6.71  a 
year  instead  of  $8.90.  This  applied  to  purchase  in- 
surance at  the  rate  of  $32.20  a  year  gives  about 
$208.40.  This  is  manifestly  unfair  as  compared  with 
policies  becoming  paid-up  in  the  usual  way,  at  any 
rate;  but  many  companies,  not  content  with  this, 
make  the  paid-up  insurance  non-participating  though 
purchased  at  a  participating  rate,  thus  inflicting 
further  injustice.  Many  companies  also  condition 
the  giving  of  paid-up  insurance  upon  the  surrender  of 
the  policy  within  a  specified  time,  as  if  it  were  still  a 
grace  instead  of  a  right.  So  stubbornly  do  tradi- 
tional wrongs  cling  to  life. 

The  exact  and  correct  method  for  calculating  paid- 
up  values  for  limited-payment  policies  is  to  apply  the 
net  reserve  as  a  net  single  premium  to  the  purchase 
of  insurance  at  the  age  attained.  This  will  give 
less  insurance  in  the  earlier  years  of  the  policy  and 
much  more  in  later  years;  but  it  is  exact  justice  at  all 
times.  In  a  modified  form  this  method  is  in  use 
among  some  companies,  but  most  frequently  the 
insurance  is  charged  for  at  the  gross  premium 
rates. 

Similarly,  the  proper  mode  of  determining  paid-up 
endowment  values  is  to  apply  the  reserve  to  purchase 
a  paid-up  endowment  running  through  the  unexpired 
term  at  the  net  single  premium  required  for  such  an 
endowment.  This  process  will  'likewise  give  a 
smallerpolicy  in  the  earlier  j^ears  and  a  larger  in  the 
later  years  than  the  formula  in  common  use. 

In  the  use  of  the  term  ''net  single  premium"  every- 
where in  the  foregoing,  such  amount  is  meant  as  is 


92 


considered  an  adequate  reserve  upon  a  paid-up  policy 
of  like  character  when  that  age  is  attained.  That  no 
provision  should  be  made  for  expenses  in  such  a  pre- 
mium is  not  intended;  but  that  no  more  ample 
provision  is  required  than  in  the  case  of  policies 
already  paid-up  and  presenting  similar  liabilities  for 
the  company  is  axiomatic. 

The  practice  of  making  such  paid  up  policies  non- 
participating  or  without  rights  to  future  surplus  is 
well-nigh  universal,  except'  where  statutory  enact- 
ments supervene  to  prevent.  It  admits  of  no  defense, 
when  the  premiums  exacted  are  such^  as  would  be 
charged  a  new  applicant  for  a  participating  policy, 
which  is  ordinarilv  the  case. 


93 


SURRENDER  VALUES— EXTENDED  INSURANCE. 

The  reserve  on  a  policy  is  of  the  nature  of  a  fund 
to  help  out  future  premiums.  It  was  but  natural, 
therefore,  that  there  should  be  proposed  a  method  of 
accomplishing  that  end  upon  the  failure  of  premiums 
by  default.  The  purpose  of  the  insured  in  paying 
premiums  was  assumed  to  be  to  carry  the  amount  of 
insurance  specified  in  the  policy;  and  that  design  was 
furthered,  upon  non-payment  of  premiums,  by  apply- 
ing the  reserve  of  the  policy  to  continue  the  insur- 
ance. 

The  simplest  of  these  extensions,  though  almost 
the  latest  in  order  of  adoption,  is  the  giving  of  a 
specified  grace  in  payment  of  premiums,  charging 
therefor  at  customary  rates  of  interest.  This  re- 
lieves insurance  of  its  harsh  character  and  gives  a 
reasonable  opportunity  for  reaching  and  advising 
the  policyholder  before  he  has  lost  his  rights.  A  lit- 
tle leniency  in  this  regard  is  certainly  desirable  both 
in  the  interest  of  insured  and  company,  as  insurance 
should  not  be  a  snap-judgment  affair  and  cannot  af- 
ford to  take  upon  itself  such  semblance.  The  only 
objection  urged  against  this  plan  in  practice  is  that, 
when  the  public  has  become  used  to  it,  all  will  take 
advantage  of  the  time  and  thereby  any  real  advan- 
tage will  be  lost.  That  is  altogether  erroneous,  as 
companies  practicing  the  system  will  readily  attest. 
As  much  might  likewise  be  assumed  from  the  fact 


9i 

that  no  one  cares  to  pay  interest  unless  obliged  to 
do  so. 

Some  companies  not  regularly  allowing  grace  put 
such  a  provision  in  their  policies  upon  request,  thus 
discriminating  between  policyholders  in  a  very  rep- 
rehensible manner.  Many  companies  which  dis- 
avow all  privileges  of  this  sort  privately  instruct 
their  agents  to  grant  grace  at  discretion  and  permit 
them  to  hold  back  reports  in  consequence,  a  prac- 
tice which  has  frequently  been  the  cover  if  not  the 
cause  of  embezzlement.  One  company  at  leas  t  grants 
an  extension  in  the  payment  of  premium  for  a  period 
to  suit  the  exigency  upon  request  and  at  the  discre- 
tion of  its  actuary,  who  is  supposed  to  take  into  ac- 
count the  policy's  reserve  value  in  his  consideration 
of  the  matter.  Such  favors  must  be  asked  for,  how- 
ever, before  lapse  by  non-payment,  or,  if  afterward, 
can  be  granted  only  upon  proof  of  continued  health. 
As  the  possibility  of  such  extension  is  usually  un- 
known to  the  insured,  and  as  it  is  human  nature  to 
expect  to  be  able  to  pay  until  the  day  is  at  hand, 
this  system  of  grace  can  hardly  be  considered  gener- 
ally useful. 

The  foregoing  relates  to  the  cases  of  men  who  in- 
tend to  continue  their  policies  by  the  payment  of  pre- 
miums. The  application  of  the  reserve  to  carry  on 
the  insurance  when  the  policy  has  been  intentionally 
lapsed  by  non-payment  presents  other  and  quite  dif- 
ferent features.  In  many  such  cases  it  would  be 
erroneous  to  assume  that  the  insured  desired  to  have 
his  reserve  applied  to  continue  his  policy.  The  actual 
facts  disprove  the  theory.  In  any  case,  to  use  the 
reserve  to  pay  premiums  on  the  original  policy— unless 


95 


the  increase  of  the  reserve  by  such  payment  be  taken 
into  the  account — would  be  a  spoliation  under  the 
masque  of  justice.  Yet  such  was  originally  the  prac- 
tice of  the  institutions  which  then  most  loudly  de- 
fended the  extension  system.  Such  a  miserable 
pretense  of  fair  treatment  is  even  to  this  writing 
found  in  the  policy  of  one  company,  the  conditions 
reading  as  follows:  '*  Continue  in  force  for  such  time 
as  one  annual  premium  on  this  policy  is  contained  in 
its  reserve  value  according  to  the  American  four  per 
cent  table  of  mortality,  at  the  end  of  which  time  this 
contract  shall  cease."  Such  a  policy  becomes  non- 
participating,  although  the  premium  charged  is  the 
full  participating  rate.  Not  content  with  so  enor 
mous  an  overcharge,  the  company  stipulates  for  a 
deduction,  in  the  event  of  the  insured's  decease,  of  all 
forborne  premiums  with  six  per  cent  interest  thereon. 
Yet  even  this  is  a  great  improvement  over  a  former 
policy  in  which  the  six  per  cent  reserve  was  used  as 
a  basis  and  the  dear  public  hoodwinked  into  think- 
ing it  better  than  a  four. 

If  such  practices  can  be  successful  at  this  late  day, 
it  can  easily  be  imagined  what  deception  was  em- 
ployed when  life  insurance  was  new.  One  con 
sequence  of  the  prevailing  indisposition  to  do  any 
thing  like  justice  in  his  day  was  the  effort  of  Elizur 
Wright  to  secure  equity  for  the  insured  by  legislation. 
Upon  his  initiative,  laws  were  enacted  in  Massachu- 
setts compelling  companies  organized  under  its  laws 
to  continue  the  insurance  in  force  for  a  time  deter- 
mined by  the  amount  of  the  reserve,  less  a  small 
surrender  charge,  taken  as  a  single  term  premium. 
That   there  might  be  no  excuse  for  delay  because  of 


96 


incomplete  actuarial  calculations,  the  brave  old  man 
caused  a  complete  table  of  single  premiums  for  all 
terms  and  at  all  ages  above  10  to  be  prepared  and 
printed  in  the  State  reports.  That  table  alone  would 
render  the  reports  valuable  documents. 

At  the  time  this  legislation  was  made  there  were 
few  policies  other  than  life;  endowments  were  just 
coming  into  use.  Consequently  Mr.  Wright  was 
justified  in  assuming  that  the  sole  object  for  which 
men  paid  premiums  was  to  secure  insurance.  His 
efforts  were,  therefore,  directed  toward  obtaining  for 
them  the  fulfillment  of  the  desired  ends.  Modern 
insurance  presents  precisely  contrary  features  to  those 
familiar  to  him  at  that  day,  being  for  the  most  part 
investment  in  character  and  looking  toward  the 
ultimate  payment  of  cash  during  the  lifetime  of  the 
insured.  Therefore  the  old  rule  will  not  so  well 
apply,  and  the  legislation  has  been  found  in  most 
cases  useless  and  in  some  cases  harmful.  Massachu- 
setts long  ago  revised  her  laws  to  accommodate  the 
new  features,  and  placed  greater  emphasis  upon  a 
cash  surrender  allowance,  also  insisted  upon  by  Mr. 
Wright.  New  York  permitted  her  laws  to  become 
optional  instead  of  compulsory,  and  in  the  matter 
of  extensions  Missouri  stands  alone  in  compelHng 
surrender  privileges  of  that  nature. 

Companies  favoring  the  extended  insurance  sur- 
render system  have  accommodated  the  change  of  base 
from  protection  only  to'  combined  protection  and  in- 
vestment by  causing  only  so  much  of  the  reserve  as 
is  necessary  to  carry  term  insurance  for  the  amount  of 
the  policy  through  the  remainder  of  its  term  to  be 
applied  to  that  purpose.     The  remaining  portion  of 


97 


the  reserve  is  then  used  as  a  single  premium  for  the 
purchase  of  a  diminished  endowment  due  at  the  expi- 
ration of  the  original  term. 

All  of  the  companies  granting  extended  insurance 
make  the  policies  non-participating  from  the  date  of 
default  in  premium,  most  of  them  forfeiting  the  last 
dividend  earned  as  well.  None  of  the  various  laws 
relating  to  extensions  require  the  companies  to  con- 
tinue the  policies  as  participating  contracts. 

Actuaries  have  not  urged  many  objections  to  ex- 
tended insurances  except  when  it  is  optional  with  the 
policyholder  whether  he  takes  paid-up  insurance  or 
extended  insurance  upon  surrender.  It  has  been  all 
but  unanimously  held  b^^  American  actuaries  in  the 
past  that  there  is  grave  danger  of  adverse  selection 
of  risks  when  such  is  the  case.  There  seems  to  be 
justification  in  reason  for  the  view  that  a  man  who 
has  great  confidence  in  his  vitality  would  select  paid- 
up  insurance,  while  another,  conscious  of  impending 
death,  would  prefer  extended  insurance.  This  has 
been  thought  especially  true  where  an  additional 
cash  option  was  offered.  Perhaps  the  defect  in  this 
reasoning  lies  in  the  assumption  that  a  man  who 
knows  himself  to  be  near  his  death  will  sustain  his 
policy  at  all  hazards.  More  probably,  however,  men 
do  not  act  reasonably  at  all.  A  case  recently  came 
to  the  writer's  attention  of  a  man  who  despite  danger- 
ous illness  not  only  failed  to  meet  a  premium,  though 
he  had  the  money,  but  even- neglected  to  apply  for  the 
paid-up  insurance  to  which  he  was  entitled.  This 
with  the  full  concurrence  of  his  wife,  the  beneficiary, 
and  after  advising  with  his  banker.  Such  may  be 
an  extreme  case;  but  in  any  event  statistics  have 


98 

proven  the  adverse  selection  theory  a  chimerical  bug- 
a-boo. 

The  leading  Australian  company,  as  old  and  as 
large  as  most  of  the  American  companies,  makes  a 
practice  of  allowing  a  grace  on  all  premiums,  of 
applying  dividends  as  reversionary  additions  v^ith 
privileges  of  cash  conversion  at  will,  of  extending  the 
insurance  upon  non-payment  of  premium  by  charg- 
ing the  premiums  against  the  original  policy  as 
loans  until  the  entire  reserve  including  all  dividends  is 
exhausted,  permitting  payment  of  premiums  with- 
out health  conditions  at  any  time  during  such 
extension,  and  permitting  surrender  for  cash  or  paid- 
up  insurance  at  any  time.  Despite  all  these  privileges, 
considered  so  conducive  of  adverse  selection,  and 
many  other  freedoms  avoided  by  most  American 
companies,  the  company  contrives  to  pay  divi- 
dends far  in  excess  of  any  American  company.  Its 
interest  does  not  average  a  higher  rate  than  some 
American  companies  experience. 


99 


SURRENDER  VALUES—CASH.. 

Until  recent  years,  cash  was  not  usually  given  as 
a  surrender  value  even  upon  urgent  request,  cer- 
tainly not  as  a  matter  of  course  or  of  right.  Life  in- 
surance began  as  a  proprietary  business,  and  even 
the  first  mutual  companies  were  essentially  proprie- 
tary without  the  safeguard  of  a  stock  interest.  Even 
to  this  day,  such  is  often  the  case.  Consequently  the 
attitude  of  companies  when  requested  to  redeem 
their  promises  to  pay  before  maturity  was  that  of 
the  greedy  note-shaver  of  a  country  town.  Covering 
themselves  behind  the  mystery  of  a  mortality  table, 
and  often  by  a  sanctimonious  concern  for  the  victim's 
family,  pretending  to  wish  to  discourage  the  Hghtly 
surrendering  of  the  protection  of  widows  and  or- 
phans, company  managers  have  filched  large  sums 
from  persons  who  by  immediate  distress  were 
compelled  to  realize  on  all  possible  resources  at  what- 
soever sacrifice.  Such  profiting  by  the  need  of  others 
was  reprehensible  enough  when  it  resulted  in  a  direct 
gain  to  the  managers.  Now,  when  any  such  profit 
is  supposed  to  inure  to  other  members,  who  may 
each  in  turn  be  thus  despoiled,  no  excuse  can  be 
offered;  unless  the  charges  in  relation  to  perquisites 
of  managers  from  surrender  charges  are  true. 

So  long  as  there  was  no  definite  understanding  of 
what  constituted  a  proper  reserve  on  a  policy,  it  was 
perhaps  unavoidable  that  there  should  be  a  wide 
variance  in  the  estimate  of  its  cash  value.  In  mutual 


100 


insurance  there  would  seem,  however,  to  be  no  ques- 
tion whatever  as  to  what  should  be  allowed  upon 
surrender.  In  such  companies  the  insured  should  not 
part  from  the  ownership  of  his  money  because  he  in- 
trusts its  possession  to  the  company.  The  company 
has  no  right  to  appropriate  more  of  it  than  is  neces- 
sary- to  cover  the  policy's  just  share  of  death  losses 
and  expenses.  Whatever  remains  should  be  consid- 
ered the  property  of  the  policyholder,  and  is  either 
surplus  or  a  fund  to  help  out  future  premiums.  If 
the  former,  the  title  may  be  doubtful,  as  such  sur- 
plus may  by  the  very  essence  of  the  contract  be  the 
property  of  survivors  only.  But  the  reserve  will  not 
be  called  on  to  meet  future  premiums  upon  the  in- 
sured's life  if  he  carries  no  insurance,  and  there  is  no 
good  reason  why  all  should  not  be  returned  to  him, 
if  any. 

The  indisposition  of  most  companies  to  do  any- 
thing near  justice  in  this  regard  moved  Elizur 
Wright  to  get  before  the  Massachusetts'  legislature 
a  bill  requiring  all  Massachusetts'  companies  to  pay 
a  cash  value  for  any  policy  surrendered  upon  its  an- 
niversary. This  cash  value  was  to  be  determined  by 
deducting  from  the  4  per  cent  actuaries'  reserve 
a  moderate  surrender  charge.  This  surrender 
charge  was  a  percentage  of  the  present  value  of 
future  * 'costs  of  insurance"  or  net  insurance  value, 
such  percentage  being  sufficient  to  cover  any  ad- 
verse selection  caused  by  the  withdrawal  of  the 
life.  Radically  this  plan  was  the  outgrowth  of 
proprietary  ideas;  and  the  surrender  charge  was 
not  so  much  to  counterbalance  a  loss  as  a  future 
profit    expected   to   be   made.     It    was    essentially 


101 

adapted  to  life  policies  only  and  to  companies  ex- 
pecting to  reap  a  profit  for  stockholders  from  the 
premiums.  Upon  endowments  the  surrender  charge 
was  not  merely  less  than  on  life  policies  but  less 
than  on  term  policies  also.  The  objection  to  allow- 
ing ample  cash  values  because  of  possible  adverse 
selection  may  be  dismissed  as  bosh;  all  statistics 
prove  the  contrary.  Any  possible  gain  made  by  such 
ill  treatment  of  patrons  has  been  much  more  than 
counterbalanced  by  the  increased  cost  and  difficulty 
of  obtaining  business.  The  average  sensible  person 
nowadays  refuses  to  take  an  insurance  "until  I  can 
see  my  way  clear,"  knowing  full  well  that  he  will  be 
despoiled  if  he  falls  on  the  way.  Consequently,  he  is 
either  altogether  deterred  from  entering  or  is  brought 
to  do  so  only  after  much  soliciting.  He  must  think 
not  merely  of  this  year's  outlay  but  of  his  ability  to 
meet  future  premiums.  The  gratuitous  concern  for 
others'  families  put  forth  in  the  pretense  of  discour- 
aging lapses  would  be  ludicrous  were  the  subject  not 
so  serious.  Nothing  is  so  sure  to  make  one  lapse 
without  delay  in  most  cases  as  the  discovery  that  he 
will  not  be  fairly  treated .  Nothing  is  so  likely  to 
encourage  him  to  continue  as  the  confidence  that 
whatever  befall  he  will  get  good  value  for  his  money. 
Men  can  be  led  but  not  be  driven. 

The  last  argument  against  regular  cash  values, 
and  one  commonly  conceded  to  have  more  force  than 
all  others,  is  the  possible  danger  of  embarrassment 
to  the  companies  because  of  a  general  demand  dur- 
ing panicky  times.  There  is  doubtless  some  cogency 
in  this  position  as  it  is  found  to  obtain  in  banks, 
and  the  similitude  between  life  companies  and  banks 


102 

becomes  greater  the  more  investment  insurance  is 
urged.  It  might  be  inconvenient,  if  not  disastrous, 
to  be  compelled  to  market  long-time  securities  in  a 
crisis;  and  such  is  certainly  to  be  avoided.  Banks  of 
deposit  are,  by  the  laws  of  most  States,  prohibited 
from  holding  such  securities  if  they  accept  demand 
deposits.  Policies  made  surrenderable  for  cash  at 
the  option  of  the  holder  are  in  effect  demand  certifi- 
cates. As  has  already  been  said,  however,  the  Mass- 
achusetts law  requires  cash  values  only  at  anniver- 
saries of  the  policy  and  is  therefore  not  subject  to 
this  objection. 

That  life  companies  are  embarrassed  by  this  phase 
of  the  matter  is  their  own  fault.  Had  they  been  dis- 
posed to  act  fairly  there  would  have  been  no  public 
demand  for  such  conditions  in  the  policy  and  a  com- 
pany could  refuse  cash  payment  for  surrendered  poli- 
cies whenever  it  was  necessary  in  order  to  avoid  dis- 
aster. But  under  no  circumstances  is  a  company 
justifiable  in  refusing  to  pay  the  full  reserve  when  it 
pays  anything;  * 'discouraging  surrenders"  is  a  piti- 
able subterfuge  unworthy  of  men  vested  with  so 
great  a  trust.  That  the  public  believe  a  company 
insincere  in  its  profession  of  desire  to  do  equity  in  the 
matter  of  surrender  values  is  btcause  of  the  public's 
bitter  experience  in  that  regard.  Until  that  experi- 
ence fades  away  and  is  reversed  by  new  experience  of 
a  contrary  character,  the  public  will  demand  definite 
agreements  in  the  contract  and  will  not  be  satisfied 
with  excuses  of  whatsoever  character. 

Meanwhile,  many  companies  seek  to  avoid  possi- 
ble dangers  of  the  sort  just  described  by  stipulating 
for  notice  a  number  of  months  in  advance  or  for  sur- 


103 


render  only  upon  the  anniversai'y  of  the  policy.  In 
so  far  as  these  conditions  are  intended  only  to  ^Yoid 
the  possibility  of  a  run  upon  the  company  and,  con- 
sequently, in  so  far  as  they  are  enforced  only  when 
necessary,  they  are  unobjectionable.  If,  as  is  often 
true,  they  are  made  use  of  in  times  of  no  financial 
stress  as  an  excuse  for  an  absolutely  indefensible  dis- 
count from  the  cash  values  pretended  to  be  given, 
they  are  utterly  disgraceful. 


104 


PREMIUM  AND  OTHER  LOANS. 

The  recognition  of  the  policyholder's  right  to  the 
value  of  his  policy  carried  with  it  the  privilege  of 
using  it  as  a  collateral  security  for  a  loan.  The  fact 
that  no  safer  or  better  securities  than  their  own 
policies  could  be  found  was  recognized  by  companies 
at  an  early  day,  and,  had  it  not  been  involved  with 
the  disputed  matter  of  cash  surrender  values,  it  is 
probable  that  the  privilege  of  a  loan  not  exceeding 
the  reserve  value  would  long  ago  have  been  granted 
by  all  companies.  For  the  actuarial  objection  of  ad- 
verse selection  could  hardly  apply,  since  by  this 
means  men  who  would  otherwise  surrender  their 
policies  would  be  induced,  and  enabled  as  well,  to 
continue  them.  Likewise,  it  cannot  be  argued  that 
such  a  convenience  would  result  in  men  lightly  sur- 
rendering the  protection  of  their  families,  which 
possibility  so  troubles  the  truly  good  among  insur- 
ance managers.  Instead,  men  v^ould  thus  find  in 
their  life  policies  the  friends  in  need  who  are  friends 
indeed,  a  means  of  relief  during  the  extremity  of 
misfortune  and  an  unfailing  resource  of  their  families 
after  their  death. 

Surely,  anything  which  will  make  life  insurance 
more  efficacious  should  be  fostered.  The  purposes  for 
which  it  is  purchased  nowadays  are  two,  the  protec- 
tion of  families  against  the  loss  of  support  and  the 
accumulation  of  a  fund  for  **a  rainy  day."  It  cannot 


105 


be  successfully  denied  that  both  these  ends  are  sub- 
served by  permitting  the  fund  to  be  drawn  against 
when  an  exigency  arises. 

This  is  particularly  true  in  the  case  of  policies  in 
which  the  investment  element  predominates.  Such 
policies  are  of  the  nature  of  bonds  and  it  is  often  of 
the  highest  importance  that  they  should  be  availa- 
ble as  collateral.  Any  one  familiar  with  soliciting  in 
the  life  insurance  business  must  be  convinced  that  to 
make  the  hypothecation  of  policies  free  as  possible 
would  greatly  widen  the  scope  of  insurance  and  facil- 
itate soliciting.  I^ife  insurance  policies  will  con- 
tinue to  be  regarded  by  the  public  as  low-class  in- 
vestments so  long  as  companies  deliberately  discredit 
their  own  promises  to  pay  by  refusing  to  recognize 
them  as  desirable  security  for  their  investments.  A 
general  reformation  in  this  regard  would  result  in 
the  common  acceptance  of  such  policies  as  collateral 
all  over  the  countr^^  and  at  all  financial  institutions, 
and  would  correspondingly  relieve  the  pressure  upon 
life  insurance  agents  for  accommodation  loans,  at 
the  same  time  rendering  the  sale  of  insurance  much 
easier. 

The  objection  urged  against  cash  surrender  values 
because  of  the  possibility  of  a  sudden  and  united  call 
for  money  necessitating  a  sale  of  securities  would 
seem  to  have  little  appositeness  in  the  case  of  loans; 
although  the  same  fatuity  which  caused  the  compa- 
nies to  act  insincerely  about  cash  values,  until  the 
people  no  longer  believed  anything  not  written  in  the 
contract,  has  brought  about  a  similar  situation  in 
the  matter  of  loans.  It  would  be  common  sense, 
were  the  people's  confidence  in  the  rectitude  of  in- 


106 


surance  management  such  as  it  should  be,  first,  that 
companies  would  gladly  loan  up  to  the  full  value  of 
policies  at  current  rates  of  interest,  and,  second,  that 
no  one  would  expect  such  a  loan  were  there  no  loan- 
able funds  in  the  treasury.  Such  would  be  the 
reasonable  expectation  of  a  man  who  held  a  time  de- 
posit certificate  in  a  bank— just  that  and  no  more. 
But  the  perverse  action  of  insurance  managers  has  led 
men  to  expect  anything  but  what  one  would  expect  in 
anything  else;  and  this  well-grounded  suspicion  will 
not  be  quieted  by  less  than  definite  promises  in  the 
contract  itself,  and  capable,  therefore,  of  legal  enforce- 
ment. To  such  a  pass  has  the  folly  and  stupidity  of 
the  past  brought  insurance  that  companies  are 
now  about  to  be  compelled  by  popular  distrust  of 
their  pretenses  to  promise  such  loans  in  a  definite 
manner  without  reference  to  the  company's  con- 
venience. 

There  is  no  shadow  of  reason  in  refusing  to  loan 
the  full  reserve,  if  any  loan  is  to  be  made.  To  talk  of 
margins  where  one's  own  promise  to  pay  is  the  col- 
lateral is  worse  than  ridiculous;  and  the  remnant  of 
that  ancient  pretense  of  fatherly  solicitude  for  the 
assured 's  family  and  assumed  guardianship  over  him 
and  them,  which  is  put  forth  as  a  sometimes  excuse 
for  loaning  but  one-half  or  two-thirds  the  reserves,  is 
sillier  still.  It  is  better  to  loan  a  man  the  full  reserve 
and  keep  his  patronage  than  to  pay  it  to  him  and 
lose  his  patronage.  In  a  bank  it  would  be  far  better 
to  loan  a  man  the  face  value  with  accrued  interest  of 
a  3  per  cent  time  certificate,  the  loan  to  bear  6  per 
cent,  than  to  cash  his  certificate  and  let  him  go  his 
way.     Bankers  are  already  familiar  with  the  same 


107 


principle;  they  decide  as  to  discounts,  taking  into 
account  tlie  customer's  balance,  thus  augmenting 
the  average  actual  interest. 

Certain  companies  have  made  a  distinction  be- 
tween loans  against  policies  when  the  loans  are  to 
pay  premiums  and  loans  for  other  purposes.  Loans 
of  the  former  kind  are  defended  as  praiseworthy  and 
loans  of  the  latter  sort  condemned  as  tending  to  re- 
duce the  value  of  the  insurance  to  the  beneficiary. 
Premium  loans  have  been  made  in  several  ways.  A 
very  common  form,  which  raged  for  a  number  of 
years,  was  known  by  the  generic  name  of  ''premium 
loan  or  part-note  plan."  It  consisted  of  accepting 
notes  for  a  definite  fraction  of  the  premium  from  the 
start,  such  notes  usually  payable  from  proceeds  of 
the  policy  only.  The  percentage  of  premiums  for 
which  notes  w^ere  given  v^as  supposed  to  be  fixed  to 
accord  with  the  current  annual  dividends,  and  in 
practice  agents  were  instructed  to  assert  that  the 
dividends  would  take  care  of  notes  and  interest,  a 
prophecy  or  estimate  which  rarely  proved  reliable. 
As  such  policies  were  bought  for  their  supposed 
cheapness,  and  as  the  increasing  indebtedness  against 
them  resulted  in  increasing  cost  with  decreasing  in- 
surance, they  proved  very  unsatisfactory  and  were 
lapsed  in  large  numbers.  The  experience  of  compa- 
nies under  such  contracts  has  been  repeatedly  quoted 
as  the  strongest  possible  argument  against  all  forms 
of  loans — an  argument  more  plausible  than  forcible. 
This  form  of  premium  loans  is  now,  happily,  almost 
obsolete;  it  was  never  demanded  by  the  public,  but 
w^as  foisted  upon  it  under  a  misapprehension  of  the 
subject. 


108 

Another  form  of  premium  loan  is  the  loaning  of  a 
full  premium  upon  request.  This  does  not  wideh^ 
differ  from  ordinary  loans,  except  in  the  insufferable 
endeavor  to  dictate  what  the  policyholder  shall  do 
with  his  money.  A  few  years  ago,  a  leading  company 
adopted  this  idea  in  a  policy  which,  by  other  less 
agreeable  features,  attracted  widespread  notice.  It 
agreed,  after  a  certain  number  of  years,  to  loan  any 
or  all  premiums  through  a  second  term  of  years, 
thus  securing  the  policyholder  against  loss  of  his  pol- 
icy through  inability  to  meet  premiums.  Its  initia- 
tive has  been  followed  by  some  other  companies  and 
seems  to  have  had  some  effect  upon  the  practices  of 
many  companies. 

At  present  there  is  the  widest  diversity  in  the  mat- 
ter of  loan  privileges.  Several  companies  agree  to  loan 
a  percentage  of  the  reserve,  varying  from  50  per  cent 
to  90  per  cent.  Some  of  these  impose  conditions  as 
to  time  for  application;  others  do  not.  One  company 
which  in  all  other  particulars  prides  itself  upon  treat- 
ing all  policyholders,  old  and  new,  without  discrim- 
ination, grants  premium  loans  to  ordinary  policy- 
holders on  request  but  denies  them  to  holders  of  ac- 
cumulated-surplus  policies— a  preference  not  defensi- 
ble on  any  ground,  since  the  latter  policies  are  the 
better  security  and  the  loss  of  them  a  severer  one  to 
the  holder,  resulting  in  the  total  forfeiture  of  the  sur- 
plus. But  one  company  has  as  yet  made  arrange- 
ments to  loan  the  full  reserve,  and  it  does  so  only  at 
periods  five  years  separated,  the  amount  loaned  at 
intervening  times  being  the  same  as  at  the  close  of 
the  last  period. 


109 


POLICY  CONTRACTS.— THE  APPLICATION. 

In  reading  modern  life  insurance  policies,  one  is 
met  at  the  very  outset  by  a  reference  to  another  in- 
strument, or  other  instruments,  supposed  to  have 
been  executed  by  the  insured.  In  various  and  often 
studied  phrases  such  writings  are  stated  to  have 
been  accepted  as  warranties,  to  be  the  basis  of  the 
contract,  to  be  partial  consideration  for  the  con- 
tract, to  be  part  of  the  contract  itself,  etc.  Upon 
reference  to  these  papers  they  are  found  to  consist  of 
certain  declarations  and  promises  made  by  the  in- 
sured and  recorded  either  by  the  company's  agent  or 
medical  examiner  or  partly  by  each.  The  declara- 
tions cover  the  personal  and  family  history  of  the 
applicant,  both  by  general  and  detailed  statements, 
his  present  condition  in  all  regards,  and  his  inten- 
tions in  many  regards.  His  promises  are  commonly 
merely  assent  to  stipulations  printed  on  the  sheet 
and  often  imperfectly  understood  by  him. 

The  effect  of  incorporating  such  paper  or  papers 
into  the  contract  is  intended  to  be  the  placing  of  all 
statements  contained  therein  upon  the  footing  of 
warranties  instead  of  representations.  This  distinc- 
tion is  of  a  purely  legal  character,  not  generally  un- 
derstood, yet  of  the  highest  importance.  If  no  refer-  < 
ence  were  made  to  such  writings,  or  if  they  were  re- 
ferred to  as  mere  representations,  the  construction  of 
a  court  would  be  that  such  statements  must  be  true 


110 

to  the  best  of  the  insured's  knowledge  and  belief,  if 
at  all  material  to  the  eontract.  Thus,  to  avoid  such 
a  contract,  a  company  would  be  compelled  to  prove, 
first,  that  the  information  withheld  would  probably 
have  caused  the  rejection  of  the  life  proposed,  and, 
second,  that  the  insured  knew  the  facts.  Such  proof 
would  raise  a  strong  presumption  of  fraud,  which 
might  be  confirmed  by  other  evidence,  but  which, 
though  unconfirmed,  would  nevertheless  seem  well- 
nigh  incontrovertible. 

The  two  propositions  named  are,  however,  both 
very  difficult  to  prove  in  ordinary  cases  and  it  is  to 
escape  from  that  difficulty  that  a  resort  to  the  war- 
ranty system  was  hit  upon.  A  warranty  is  a  solemn 
declaration  of  the  absolute  truth  of  statements, coup- 
led v^ith  a  consent  that  the  contract  shall  fail  if 
they  are  found  false  in  any  particular.  This  is 
accomplished  by  making  such  statements  not  merely 
representations  in  order  to  obtain  insurance,  but 
statements  offered  as  a  basis  and  part  consideration 
for  the  contract.  The  failure  of  any  part  of  the 
application  is,  therefore,  a  failure  of  the  foundation 
involving  the  downfall  of  the  superstructure,  or,  to 
change  the  metaphor,  a  failure  of  the  consideration 
voiding  the  contract  ab  initio.  It  is  no  longer  neces- 
sary to  prove  that  the  error  is  material,  that  it  was 
made  with  full  knowledge  of  the  fact,  that  it  was  by 
inference  at  least  intentional  and  therefore  fraudulent. 
The  only  thing  required  to  be  proved  in  order  to 
avoid  the  contract  is  that  any  statement  is  not 
strictly  true  or  any  promise  not  exactly  fulfilled. 
Such  is  the  law,  and  that  it  is  not  enforced  in  all  its 
stringency   is  because  there  has  arisen  a  series  of 


legal  restrictions  which  interfere  with  its  application, 
and  furthermore,  and  more  particular^,  because 
petit  juries  blindly  do  justice  in  defiance  of  law.  The 
courts,  recognizing  the  iniquity  of  the  system,  seize 
every  opportunity  to  render  all  warranty  stipula- 
tions nugatory.  The  application  being  constructed 
by  the  company  and  the  statements  therein  recorded 
by  its  agent  or  representative,  it  is  a  legal  maxim  to 
construe  it  strictly  as  to  the  company  and  liberally 
as  to  the  insured .  The  same  applies  to  the  policy 
itself  with  even  greater  force.  Means  of  getting  evi- 
dence as  to  materiality  of  the  statements,  the  igno- 
rance of  the  insured  concerning  the  facts,  and  the 
absence  of  fraudulent  intent  are  usually  to  be  found; 
and,  when  such  evidence  of  a  convincing  character  is 
presented,  juries  soon  do  what  is  right  between  the 
parties,  without  regard  to  legal  hair-splitting. 

That  such  is  the  case  does  not  in  the  least  relieve  in- 
surance companies  of  the  odium  of  keeping  up  this 
vile  system.  The  oft-repeated  assertion  that  claims 
are  not  contested  unless  believed  to  be  fraudulent  is 
no  excuse;  the  only  possible  proof  of  such  honest  pur- 
pose would  be  to  throw  away  all  defenses  except 
against  fraud.  If  a  company  cannot  prove  fraud  to 
a  jury,  it  has  no  right  to  expect  the  public  to  believe 
that  there  is  fraud  or  to  shield  corporate  greed  and 
oppression  under  the  name  of  justice.  At  the  best, 
unless  companies  intend  to  enforce  warranty  stipu- 
lations to  the  letter,  they  are  retaining  an  anti- 
quated weapon  of  defense  which  they  either  dare  not 
use  at  all  or  only  upon  occasion,  which  means  the 
vilest  discrimination — a  discrimination  between  ben- 
eficiaries. 


112 


To  make  plain  the  enormity  of  this  offense  against 
equity,  the  error  of  a  year  in  the  age  of  a  grand- 
parent at  death,  although  it  were  a  year  too  young, 
would  avail  to  set  aside  a  policy  under  a  strict  con- 
struction of  the  warranty  law.  The  existence  of  a 
secret  malady  unknown  to  every  one  at  the  time  of 
contract,  including  the  applicant,  but  v^hich  must 
have  existed  in  latent  form,  is  another  reason  of 
avoidance;  such  evidence  was  seriously  brought  forth 
in  a  cause  celebre  a  few  years  ago.  Many  of  the  in- 
quiries of  the  application  are  concerning  things  of 
which  in  most  cases  the  insured  can  have  but  hear- 
say information  and  could  not  by  any  possibility 
know  of  his  own  knowledge,  so  that  his  testimony 
thereto  would  be  competent  in  a  court  of  law. 
Many  other  questions  call  for  professional  skill  in 
diagnosis  of  diseases  not  possessed  by  all  practition- 
ers and  by  few  others.  Other  inquiries  are  so  broad 
in  their  scope  and  general  in  character  as  to  seem  to 
cover  mere  matters  of  opinion.  Yet  the  answers  to 
each  of  these  must  be  the  exact  truth  in  order  to  ful- 
fill the  requirements  of  a  warranty. 

Both  in  the  wording  of  contracts  and  in  disposi- 
tion to  contest,  using  trivial  defenses  under  the  cover 
of  warranty,  assessment  and  fraternal  societies  are 
even  greater  sinners  than  regular  companies,  as  wit- 
ness their  involved  and  misleading  certificates  and 
their  frequent  resort  to  the  courts.  In  a  vague  and 
indefinite  way  the  people  have  for  a  long  time  been 
sensible  of  the  wrong.  This  sentiment  has  shown 
itself  in  strong  resentment  against  companies  guilty 
of  any  illiberality  toward  claimants  and  a  marked 
preference  for    companies    establishing  a   contrary 


113 


reputation.  That  no  more  has  been  demanded  of  the 
co-operatives  is  only  another  proof  of  how  little  is 
expected  from  them  anyhow.  Popular  indignation 
has  resulted  in  decisions  palliating  the  severity  of  the 
law,  incurious  special  legislation  on  the  subject  here 
and  there,  in  the  incorporation  of  a  copy  of  the  in- 
sured's declarations  in  his  policy  in  many  cases,  and 
latterly  in  the  adoption  of  incontestability  provis- 
ions after  a  short  interval.  Thus,  in  order  to  preserve 
the  right  to  contest  when  no  fraud  can  be  proved, 
companies  have  been  willing  to  agree  after  a  short 
time  not  to  refuse  to  be  defrauded.  To  so  singular  a 
position  has  the  wrong-headed  determination  to 
conserve  foolish  and  antiquated  provisions  brought 
the  companies.  In  fire  insurance  the  application 
with  its  warranties  has  already  been  practically 
discarded. 

Because  the  application  was  in  the  manner  de- 
scribed made  a  part  of  the  contract,  it  v^as  found  a 
convenient  receptacle  for  many  stipulations  and  con- 
ditions, which  were  too  objectionable  in-  the  policy 
proper.  This  has  been  carried  to  a  ridiculous  point 
by  certain  companies,  which  advertise  policies  free 
from  conditions  and  use  applications  one  side  of 
which  (usually  not  seen  by  the  applicant)  is  wholly 
made  up  of  printed  conditions.  Even  then  an  over- 
flow appears  on  the  other  side  of  the  application, 
which  is  in  toto  a  warranty  and  a  consideration  for 
the  insurance.  One  of  these  companies  causes  a  man 
to  warrant  that  within  a  certain  time  he  will  not 
kill  himself;  it  could  easily  have  him  warrant  that 
he  will  not  die  at  all,  so  far  as  his  knowledge  of  sign- 
ing any  such  agreement  is  concerned.    Several  com- 


panics  insert  in  their  applications  an  agreement 
concerning  the  division  of  surplus  which  utterly  de- 
stroys the  mutuality  of  the  contract  and  surrenders 
the  insured's  interests  wholly  into  the  hands  of  the 
company's  managers.  Many  applications  yet  con- 
tain clauses  waiving  rights  given  by  special  statutory 
law,  although  the  decision  of  the  supreme  court  of 
the  nation  is  that  such  waivers  are  absolutely  void 
unless  provided  for  by  the  law  itself.  Very  obnoxious 
stipulations,  seeking  to  absolve  companies  from  all 
responsibility  for  the  frauds  of  their  agents,  are  fre- 
quently inserted.  Provisions  that  the  contract  shall  be 
considered  to  be  made  at  the  home  office  of  the  com- 
pany or  shall  be  construed  according  to  the  laws  of  a 
certain  State  are  not  infrequent.  Such  pro  visions  have 
never  been  upheld  in  any  of  the  higher  courts  and  are 
repugnant  alike  to  law  and  common  sense.  A  further 
condition  limiting  the  time  within  which  suit  may  be 
brought  against  the  company  is  sometimes  inserted; 
such  a  provision  might  be  held  legal,  judging  from  a 
decision  of  .a  national  court  upon  a  case  in  which, 
however,  the  provision  was  by  legislative  enactment. 
Similar  provisions  are  sometimes  made  concerning 
the  making  of  proofs  of  death.  The  endeavor  to 
turn  a  life  insurance  company  into  a  temperance 
society  appears  in  some  applications  as  well  as  in 
some  policies,  in  a  promise  never  to  become  an  inebri- 
ate, coupled  w^ith  a  concession  of  the  right  of  cancel- 
lation if  such  agreement  be  broken.  Nowadays, 
when  drunkeness  is  pretty  generally  believed  to  be  a 
disease,  such  stipulations  are  singular  reading. 

Other  conditions,  which  are  utterly  foreign  to  the 
real  character  of  a  proposal  for  insurance,  might  be 


115 


quoted;  but  enough  has  been  said  to  awaken  the 
reader  to  the  fact  that  the  average  application 
should  receive  a  close  examination  before  a  signa- 
ture. Anything  beyond  the  proper  statements  of 
fact  and  intention  of  the  applicant  is  really  out  of 
place. 


116 


POLICY  CONTRACTS.— THE  PROMISE  TO  PAY. 

The  form  upon  which  a  life  policy  is  modeled  is 
that  of  a  simple  contract,  best  typed  by  an  ordinary 
promissory  note.  It  is  not  in  any  sense  identical 
with  the  "bank  draft"  sometimes  spoken  of  in  ad- 
vertisements; bank  drafts  are  not  promises,  but  or- 
ders to  pay.  The  best  possible  expression  of  an 
agreement  to  pay  is  the  simplest,  namely:  I  promise 
to  pay.  The  verbose  and  tautological  manner  in 
which  this  agreement  is  set  forth  in  most  policies  is 
a  relic  of  the  days  ^when  men  were  not  expected  to  un- 
derstand their  policies,  but  to  be  awed  at  the  learn- 
ing embodied  in  them. 

Contracts  to  pay  money  should  specify  clearly  for 
what  consideration  (especially  if  not  already  per- 
formed and  to  be  performed  in  future),  at  what  time 
and  place,  upon  what  conditions,  and  to  what  per- 
son or  persons  the  money  is  to  be  paid.  These  par- 
ticulars are  necessary  for  a  self  explanatory  contract, 
and  it  is  not  a  matter  to  be  proud  of  if  an  apparent 
simplicity  of  wording  has  been  attained  by  leaving 
any  of  these  essentials  incomplete  or  bj  referring  to 
another  paper  for  explanations. 

The  reference  to  the  application  as  a  partial  con- 
sideration has  already  had  attention.  Immediately 
following  this  the  real  consideration  is  commonly 
specified,  although  in  some  contracts  no  mention  of 
this  is  made  until  later.     Rhetoric,    business  usage 


117 


and  common  sense,  however,  accord  first  place  in 
simple  contracts  to  a  recital  of  the  consideration.  In 
life  insurance  the  consideration  usually  comprises  a 
sum  of  money  paid  in  advance  and  a  like  sum  to  be 
paid  at  regular  intervals  thereafter  for  a  specified 
term  or  during  life.  Some  companies  stipulate  that 
these  premiums  must  be  payable  at  the  home  office, 
another  antiquated  condition  fallen  wholly  into  des- 
uetude. Many  stipulate  for  payment  before  a  desig- 
nated hour  and  almost  all  for  payment  upon  a  defi- 
nite day.  In  practice  so  rigid  rules  are  rarely 
enforced,  but  they  are  there  to  enforce  whenever  com- 
panies see  fit  to  do  so..  The  payment  of  a  life  insur- 
ance premium  has  little  in  common  with  a  business 
obligation;  and  when  the  invested  value  will  sustain 
the  insurance,  certainly  a  little  latitude  may  safely 
be  granted,  subject  to  a  fair  interest  charge  so  that 
it  will  not  be  lightly  taken  advantage  of.  Such 
grace  provisions  are  now  to  be  found  in  the  policies 
of  several  leading  companies. 

The  time  of  claim  payment  is  variously  expressed 
as  within  a  certain  period  after  due  receipt  and 
approval  of  the  proof  of  death  or  immediately  there- 
upon. There  appears  to  be  no  good  reason  why 
there  should  be  delay  after  the  death  of  the  insured  is 
satisfactorily  proved  and  the  identity  of  the  claimant 
established.  This  includes,  of  course,  any  inquiry 
found  requisite  aside  from  the  regular  proofs.  A  clear 
case  should  be  made  out;  but,  when  that  is  done, 
there  should  be  prompt  settlement.  The  taking  ad- 
vantage of  such  clauses  to  mulct  the  beneficiary  of 
part  of  the  proceeds  of  the  policy  in  the  form  of  a 
discount  is  a  practice  now  happily  obsolete — dead  in 


lis 

its  sins.  A  life  insurance  policy  should  be  a  promise 
to  pay  a  definite  amount  at  once  upon  the  death  of 
the  insured;  but  no  interest  should  be  allowed  be- 
cause of  unavoidable  delay  and  no  discount  charged 
because  of  prompt  action.  Conditions  compelling 
the  filing  of  proofs  within  a  specified  time  and  limit- 
ing the  time  for  legal  action  are  both  very  objection- 
able, as  serving  no  good  purpose  and  likely  to  defeat 
just  claims.  It  is  not  always  possible  in  this  age  of 
travel  for  even  the  fact  of  death  to  become  known 
within  a  short  time;  and  a  claim  against  an  honest 
company  like  one  against  an  honest  man  should 
never  be  considered  outlawed.  The  endowment 
agreement,  for  payment  during  the  lifetime  of  the  in- 
sured, of  course,  offers  no  difficulties. 

The  place  of  payment  is  usually  the  chief  ofl&ce  of 
the  company.  So  long  as  this  is  construed  to  mean 
merely  that  the  claim  will  be  paid  in  the  exchange  of 
that  city  it  is  unobjectionable.  A  literal  construc- 
tion would  be  ridiculous. 

Despite  the  pretenses  to  simplicity  of  contract,  the 
conditions  of  jDayment  are  so  manifold,  diverse  and 
complex  even  in  the  simplest  policy  forms  that  it  is  not 
considered  feasible  to  place  them  in  proper  order  in  the 
contract.  They  are  consequently  relegated  either  to 
a  second  page  or  to  the  application,  as  the  case  may 
be.  Chief  among  these  conditions  are  the  following, 
commonly  imposed  for  one,  two  or  three  years  only: 
Prohibition  against  residence  or  travel  in  the  tropics, 
or  in  certain  parts  of  this  country,  or  in  places  where 
yellow  fever  or  cholera  are  epidemic;  prohibition 
against  engaging  in  various  occupations,  such  as 
mining,  submarine  operations,  blasting,  manufacture 


119 

of  explosives,  handling  dynamos  or  electric  wires, 
service  on  railway  trains  or  vessels;  prohibition 
against  engaging  in  a  duel.  The  usual  practice  is  to 
refuse  payment,  if  at  all,  only  when  death  is  incurred 
because  of  a  breach  of  these  conditions;  but  most 
contracts  are  void  by  their  terms  whenever  these 
prohibitions  are  disregarded,  and  companies  have 
pleaded  such  breaches  in  avoidance  of  claims  arising 
from  causes  quite  other  than  the  ones  put  forth  in 
the  plea. 

Suicide  has  been  included  as  a  ground  for  refusal  to 
pay  in  the  policies  of  all  companies  with  one  honor- 
able exception.  Statisticians  and  specialists  in  brain 
diseases  have,  from  altogether  different  premises,  long 
ago  united  in  the  general  conclusion  that  few  suicides 
occur  except  as  the  result  of  mental  disease.  Despite 
the  most  rigid  provisions  in  that  regard,  covering 
self-destruction,  whether  sane  or  insane,  voluntary 
or  involuntary,  companies  have  repeatedly  found 
themselves  compelled  to  pay  claims  of  this  nature. 
No  other  single  condition  has  ever  proved  so  com- 
pletely bootless,  nor  any  so  extremely  unpopular. 

The  engaging  in  military  or  naval  service  except  in 
times  of  peace  is  usually  interdicted,  sometimes  only 
temporarily,  sometimes  permanently.  Other  com- 
panies permit  the  engaging  in  this  or  any  other  occu- 
pation and  residence  in  anyplace,  subject  to  the  usual 
extra  premiums,  which  are  a  lien  against  the  policy 
from  that  date.  It  is  doubtful  whether  an  inhibition 
against  military  service  might  not  be  considered 
void  as  against  public  policy,  as  well  as  void  because 
the  infraction  was  involuntary,  wherever  the  enlist- 
ment was  a  forced  one. 


120 


Similarly,  whether  so  stipulated  in  the  policy  or 
not,  it  might  be  found  against  public  policy  to  sus- 
tain an  action  when  death  was  occasioned  in  or  be- 
cause of  a  violation  of  law;  although  it  is  by  no 
means  clear  that  an  innocent  beneficiary  should 
be  made  to  suffer.  Sucli  a  condition  is  in  most 
policies. 

It  is  a  common  though  not  universal  practice  of 
companies  to  pay  as  a  surrender  value  the  reserve  on 
policies  voided  by  a  breach  of  these  conditions  upon 
the  death  of  the  insured.  Such  is  definitely  agreed 
upon  in  some  policies. 

The  existence  of  any  or  all  these  conditions  has 
been  felt  to  place  an  unfortunate  limitation  upon  the 
usefulness  of  insurance  by  attempting  to  circumscribe 
the  future  activities  of  the  insured.  It  is  nearly  as 
impossible  for  a  man  to  govern  his  future  mode  of 
life,  his  choice  of  occupations,  his  place  of  residence  or 
route  of  travel,  or  even  his  habits,  as  to  determine 
the  disease  which  will  one  day  carry  him  off.  He 
naturally  desires  insurance  to  cover  all  possible  con- 
tingencies and  every  exception  is  a  positive  and  a  seri- 
ous detraction  from  its  utility.  Companies  are,  of 
course,  justified  in  guarding  themselves  against  being 
used  as  conveniences  for  clever  rascals  who  endeavor 
to  get  a  bargain  in  insurance,  well  aware  that  their 
prospective  occupations  imply  a  greater  risk  than 
their  premiums  provide  for,  or  that  some  change  wrill 
render  them  uninsurable.  It  is  upon  that  ground 
that  the  retention  of  these  various  conditions  is  de- 
fended; and  the  logic  is  rather  better  than  the  aver- 
age reasons  put  forward  for  objectionable  clauses. 
The  trend  is  now  toward  greater  liberality  in  this  re- 


121 

gard  and  one  company  has  already  removed  all  con- 
ditions and  restrictions. 

A  more  disagreeable  and  less  defensible  condition 
than  of  any  of  these,  is  a  stipulation  for  the  privilege 
of  cancelling  the  policy  during  the  lifetime  of  the  in- 
sured upon  proof  that  he  has  formed  habits  tending 
to  shorten  his  life,  has  had  delirum  tremens  or  has 
been  convicted  of  felony.  A  provision  for  cancella- 
tion of  a  fire  policy  after  the  building  has  taken  fire 
would  be  a  fair  parallel.  Nothing  is  better  under- 
stood nowadays  than  the  fact  that  habits  are  dis- 
eases, capable  of  thorough  diagnosis  and  often  of 
cure;  and  surely  nothing  is  more  certain  than  tTiat 
many  innocent  men  are  convicted  of  felonies,  that 
many  guilty  men  are  not  very  bad,  and  that 
more  reprobates  are  outside  prison  walls  than  in. 
Any  stipulation  intended  to  leave  a  man  without 
insurance  and  a  family  without  protection  just  when 
most  needed,  and  most  clearly  impossible  to  obtain 
otherwhere,  should  be  roundly  condemned. 


122 


POLICY  CONTRACTS— TO  WHOM  PAYABLE. 

As  was  circumstantially  set  forth  in  the  first  of 
these  papers,  insurance  is  a  contract  for  indemnity, 
for  making  good  that  which  is  lost.  Consequently, 
insurance  cannot  properly  be  granted  to  anyone  ex- 
cept the  person  or  persons  who  have  a  financial  in- 
terest in  the  thing  or  persons  insured,  nor,  indeed, 
according  to  the  better  authorities,  even  to  such  be- 
yond the  cash  value  of  their  interest.  This  principle 
is  generally  enforced  by  law  under  the  broad  appli- 
cation of  the  maxim  "against  public  policy,"  though 
a  fair  construction  of  insurance  contracts  and  con- 
sideration of  their  indemnity  basis  would  seem  to 
render  all  reference  to  such  general  law  unnecessary. 
However,  it  would  certainly  seem  to  be  against  pub- 
lic policy  in  the  highest  degree  to  permit  a  man  who 
has  no  interest  in  another  man's  house  to  acquire  an 
interest  in  having  the  same  destroyed  by  fire.  Different 
in  degree,  but  not  in  character,  is  the  case  of  prop- 
erty insured  beyond  its  value,  for  to  the  extent  of  the 
over-insurance  the  policyholder  is  interested  in  having 
the  property  burn;  the  preponderance  of  self-interest 
is  on  that  side.  But  if  this  be  repugnant  to  public 
policy,  it  is  surely  more  outrageous  and  in  fact, 
criminal  to  permit  any  person  to  acquire  an  interest 
in  another's  dying  who  has  not  at  least  an  equal 
interest  in  his  living.  Such  a  license  would  be  to  in- 
cite to  murder. 


123 

Therefore,  it  ma^^  be  broadly  stated  that  Hfe  insur- 
ance should  not  be  made  pa3^able  to  any  person  who 
is  not  interested  in  the  life  of  the  insured  to  the  full 
amount  of  the  policy.  Concerning  relatives  the  case 
usually  presents  no  difficulty,  since  the  interest  of 
wife  and  children  in  a  man's  life  is  only  bounded  by 
the  value  of  the  life  itself  and  that  is  usually,  though 
not  always,  a  larger  amount  than  he  is  likely  to  in- 
sure for.  The  interests  of  father,  mother  and  colla- 
teral relatives  are  really  prospective  only,  unless 
they  are  alread3^  actually  dependent  upon  the  in- 
sured; for  otherwise  they  will  have  no  claim  upon 
the  insured  at  law  unless  reduced  to  poverty  and 
helplessness,  and  not  then  unless  he  can  do  more 
than  care  for  his  immediate  family.  Relatives 
further  removed  than  brothers  and  sisters,  and  pos- 
sibly their  descendants— such  relatives  as  grand  par- 
parents,  uncles,  aunts  and  cousins — have  no  genuine 
interest  whatever  in  a  man's  life  unless  an  interest  is 
created  by  the  voluntary  assumption  of  care  of  them 
by  the  insured.  Such  an  interest  as  a  basis  for  in- 
surance is  regarded  with  suspicion,  both  by  coiirts 
and  companies,  because,  if  permitted  in  the  case  of 
others  than  blood  relations,  it  would  open  the  door 
for  extended  litigation  and  for  the  perpetration  of 
fraudulent  insurances,  really  of  a  gambling  charac- 
ter. Notwithstanding  this,  there  are  no  doubt  spe- 
cial circumstances  which  may  give  one  person  moral 
and  even  legal  claims  upon  another,  because  of  the 
relations  created  by  personal  preferences  and  friend- 
ship; and  there  is  no  good  reason  why,  when  the  fact 
of  such  relations  is  established  and  the  responsibility 
confessed  by  the  insured,  an  insurance  should  not  be 


124 

granted.  A  common  case  is  where  an  engagement 
to  marry  has  been  entered  into;  insurance  in  favor 
of  the  fiance  has  been  repeatedly  held  valid  by  the 
courts  and  is  not  disfavored  by  companies.  Another, 
but  not  so  frequent  a  case,  is  that  of  parentage  out- 
side of  marriage;  the  obligation  of  the  father  to  sup- 
port his  offspring  is  every  day  more  firmly  upheld  by 
courts  and  upon  that  obligation  an  insurance  may 
very  properly  be  based.  The  mother  of  such  a  child 
is,  however,  up  to  the  present  not  considered  to  have 
any  such  interest  in  its  father's  life  as  will  support 
an  insurance.  The  law  persistently  disregards  the 
mutual  responsibilities  actually  created  by  concubin- 
age and  refuses  to  a  woman,  who  has  been  robbed 
of  everything  else,  even  recognition  pf  an  interest  in 
the  life  of  him  who  often  alone  stands  between  her 
and  further  degradation.  Such  law  is  monstrous 
and  against  the  good  morals  which  it  is  intended  to 
protect;  for  it  is  not  by  lessening  the  responsibilities 
of  men  because  of  wrong-doing  that  it  will  be  checked; 
it  were  more  to  the  purpose  as  well  as  more  just  to 
heavily  increase  them.  That  to  admit  the  insurable 
interest  of  a  mistress  in  her  lover's  life  might  lead 
to  murder  when  she  feared  that  he  was  about  to  de- 
sert her  is  true;  equally  and  similarly  true  is  it  when 
the  beneficiary  is  a  wife  instead  of  a  mistress.  Were 
the  legal  right  of  a  lem an  to  protection  and  assist- 
ance once  recognized,  she  would  have  no  greater  rea- 
son to  punish  desertion  with  death  than  would  a 
wife.  Some  companies,  at  the  imminent  risk  of  hav- 
ing to  pay  the  amount  a  second  time  to  other  claim- 
ants, have  issued  insurances  to  mistresses  and  duly 
paid  the  same,  a  deed  greatly  to  their  credit. 


125 

The  intereit  of  a  creditor  is  recognized  as  an  insur- 
able interest,  but,  by  the  better  authorities,  not  to 
an  amount  exceeding  his  legal  claim  against  the  in- 
sured. Decisions  have  been  made,  not  merely  sup- 
porting the  contrary  idea,  but  even  holding  that  as 
the  insurance  was  valid  in  the  beginning  it  is  not  in- 
validated by  the  payment  of  the  debt  and  consequent 
cessation  of  all  interest.  Such  law  is  a  disgrace  to 
the  bench  and  is  the  result  of  mere  sophistry,  coupled 
with  complete  disregard  of  the  proper  nature  of  an 
insurance  contract.  Applied  to  fire  insurance,  it 
would  continue  in  the  holder  of  a  policy  a  right  to 
insurance  upon  property  already  sold;  that  would  be 
at  once  repudiated.  It  has  not  merely  been  occasion- 
ally sustained,  however,  in  the  case  of  life  insurance 
in  favor  of  creditors,  but  has  been  sustained  as  a 
legal  principle  with  practical  unanimity  in  the  case 
of  insurance  in  favor  of  a  wife  afterward  legally  di- 
vorced. Thus  courts,  which  deny  txie  claim  of  an 
adulteress  upon  the  man  who  has  seduced  her,  sup- 
port her  claim  for  insurance  upon  the  husband  from 
whom  her  sin  has  legally  separated  her.  This  trav- 
esty upon  justice  is  a  disgrace  to  civilization. 

The  general  principle  that  insurance  should  be  in- 
demnity based  upon  an  actual  interest,  not  exceed- 
ing that  interest  and  not  extending  beyond  that  in- 
terest, is  a  safe  one  and  the  true  one. 

That  a  man  has  an  interest  in  his  own  life  to  its 
full  value  has  come  to  be  fully  recognized.  His 
right  to  mortgage  his  future  by  debt  is  a  practical 
illustration  of  that  interest.  Therefore,  it  is  not  con- 
sidered in  any  way  improper  to  permit  him  to  insure 
his  life  in  favor  of  himself,  thus  protecting  not  merely 


126 


a  single  obligation  to  one  person  or  a  few  persons, 
but  all  his  obligations  to  everybody  and  insuring  an 
estate  which  otherwise  might  never  be  left  behind 
him.  Confirmed  bachelors,  having  also  no  near  rela- 
tives or  other  person  for  whom  they  care,  often  see 
fit  to  carry  large  insurances  to  protect  beyond  any 
possibility  their  names  from  dishonor,  because  of 
shrinkage  of  estate.  Provided  al  w  ays  that  the  estate 
is  solvent,  the  right  of  a  man  to  dispose  by  will  of 
the  proceeds  of  a  life  policy,  payable  to  himself,  is  no 
more  open  to  question  than  his  right  to  dispose  of 
any  other  property  in  similar  manner.  By  special 
legislation  in  some  States  the  right  of  a  wife  and 
and  children  as  against  creditors  in  insurance  upon 
a  husband's  life,  the  premiums  on  which  have  been 
paid  by  him,  or  with  funds  contributed  by  him,  is 
limited.  Of  course,  where  a  policy  is  directly  pay- 
able to  the  insured's  administrators,  executors  and 
assigns,  the  insurance  policy  becomes  part  of  his 
estate  and  subject  to  all  laws  relating  thereto.  In- 
surable interest  in  those  claiming  by  will  is  no  more 
required  than  in  the  case  of  any  other  property  con- 
veyed by  will. 

Of  course  the  ownership  of  a  life  policy  carries  with 
it  the  right  of  assignment  to  others,  but  the  prepon- 
derance of  legal  opinions  is  that  such  assignment  is 
valid  only  to  the  extent  of  the  actual  interest  of  the 
assignee  at  the  time  of  death  of  the  insured  and  void  if 
no  such  interest  exists.  The  same  sophistry,  however, 
which  has  led  courts  to  uphold  other  contracts,  al- 
though all  interest  in  the  life  has  ceased,  has  in  the  same 
manner  led  them  to  pronounce  assignments  good  be- 
cause an  interest  existed  at  the  time  of  the  assignment, 


127 


though  such  interest  has  ceased.  Assignment  by  a 
beneficiary  other  than  the  insured  is  not  encouraged 
by  companies  and  is  looked  upon  with  great  suspicion, 
although  such  assignments,  when  they  likewise  con- 
vey the  interest  upon  which  the  insurance  is  based, 
would  seem  to  be  unobjectionable.  Otherwise  they 
would  be  subject  to  the  objection  urged  against  the 
permission  of  any  other  manner  of  holding  insurance 
upon  a  life  in  which  one  is  not  beneficially  interested. 

Nearly  all  companies  demand  notice  of  any  assign- 
ment, together  with  a  copy,  before  the  same  shall  be 
binding  upon  the  company  and  many  companies  re- 
fuse to  be  responsible  for  the  validity  of  any  assign- 
ment. By  this  means  they  endeavor  to  shield  them- 
selves and  turn  the  quarrels  between  contesting  claim- 
ants into  a  fight  with  each  other  instead  of  with  the 
company.  Whether  payment  to  a  person  not  legally 
entitled  to  it  ^would  be  considered  good  as  against 
the  legally  rightful  claimant  may  be  doubted,  even 
though  the  company  in  the  contract  disclaims  all 
responsibiHty.  Other  companies  require  proof  of  the 
fact  and  amount  of  interest  before  paying  the  pro- 
ceeds of  a  policy  to  an  assignee;  and  if  his  interest  is 
less  than  the  whole,  or  if  any  doubt  exist,  such  com- 
panies usually  demand  the  signature  of  the  adminis- 
trator or  executor  of  the  insured  as  well  as  the  sig- 
nature of  the  assignee  to  the  receipt.  This  course 
protects  at  once  the  company  and  the  often  helpless 
dependents  of  the  deceased,  who  otherwise  are  like  to 
be  robbed  by  merciless  usurers  who  have  obtained 
possession  of  policies  because  of  the  dire  necessities 
of  a  sick  and  unfortunate  man. 

Even  when  a  beneficiary  is  named  in  a  policy,  it  is 
customary  to  make  it  payable  in  case  of  survival  to 


128 


the  insured,  and  he  is  given  the  right  to  the  surplus, 
often  the  right  to  the  surrender  value  and  practically 
always  the  right  to  the  endowment  or  tontine  settle- 
ment. When  this  is  not  the  case,  and  particularly 
when  the  beneficiaries  are  minors  or  (in  some  States 
where  the  disabilities  yet  exist)  married  women,  it  is 
often  found  impossible  to  free  the  policy  so  as  to  sur- 
render it  or  assign  it,  or  even  to  utilize  the  value  of  it 
upon  maturity.  Precisely  the  same  state  of  affairs 
may  be  brought  about  by  an  assignment. 

An  attempt  to  make  policies  directly  payable  to 
persons  having  legally  no  insurable  interest  has  lately 
been  made  by  writing  the  policy  payable  to  devisees 
of  the  insured.  In  the  opinion  of  some  attorneys  the 
effect  of  this  is  to  warrant  the  company  in  paying 
directly  to  persons  designated  by  will,  without  regard 
to  the  claims  of  creditors  of  the  estate,  of  which,  they 
hold,  the  policy  or  its  proceeds  never  become  a  part. 
Undoubtedly  it  is  possible  to  limit  the  payment  as 
against  the  insured  so  that  he  cannot  dispose  of  the 
policy  in  any  but  the  specified  manner.  But  as  against 
creditors  claiming  through  him  it  is  tolerably  clear 
that  any  such  limitations  would  be  void;  for  a  man 
cannot  dispose  by  will  of  anything  not  his  ow^i  and, 
therefore,  of  nothing  which  is  not  legitimate  subject 
for  levy  to  satisfy  the  claims  of  a  creditor.  The  com- 
pany which  pays  devisees  without  the  intervention 
of  executors  might  find  themselves  compelled  to  pay 
again  by  order  of  court;  for  it  has  long  been  settled 
that  a  devise  is  not  good  unless  there  be  something 
left  after  the  claims  of  creditors  are  satisfied.  Whether 
lield  legal  or  not,  such  course  should  be  avoided  by 
companies  as  leading  to  a  neglect  of  the  real  pur- 
pose of  insurance,  namely,  indemnity. 


129 


POLICY  CONTRACTS-»SURRENDER  AND  LOAN 
PRIVILEGES. 

There  is  a  wide  variation  in  the  privileges  actually 
given  when  a  policy  is  loosely  said  to  be  '*  non-for- 
feiting" after  a  certain  time.  This  term,  which  is 
so  frequently  used  in  describing  life  policies,  in  prac- 
tice merely  means  that  some  sort  of  value  may  be 
accorded  the  insured  upon  surrender  after  a  certain 
period.  It  may  indicate  that  the  insurance  will  be 
continued  in  full  force  under  an  extension  clause 
without  any  action  on  the  insured's  part,  or,  on  the 
contrary,  it  may  mean  that  an  utterly  insignificant 
paid-up  insurance  will  be  granted  provided  applica- 
tion is  made  for  it  within  a  very  limited  time.  There 
is  just  one  thing  that  it  is  sure  not  to  mean  and  that 
is,  what  it  says.  The  original  policy  is  forfeited  in 
all  cases  for  non-payment  of  premium,  and  any  in- 
surance given  in  its  stead  is  either  for  a  different 
amount  or  of  a  diiferent  character  or  both.  The 
only  company  which  really  exhausts  the  value  of  a 
policy  in  maintaining  it  is  the  Australian  Mutual 
Proi-.ndent  Society  of  Sydney,  New  South  Wales,  Aus- 
tralia. In  insurance  as  in  politics  it  would  seem  that 
we  have  much  to  learn  from  the  newest  world  of  all. 

In  this  country,  however,  non-forfeiture  at  the  best 
means  merely  that  the  insurance  is  carried  on  for  the 
full  amount  without  anj  act  of  the  insured  so  long 
as  the  reserve  will  carry  it  as  a  term  policy.    Such 


130 


term  insurance  does  not  participate  in  profits;  neither 
does  it  represent  the  profits  already  accumulated,  if 
any.  The  insured  commonly  has  no  right  to  pay  his 
premiums  during  such  extension,  unless  he  can  pre- 
sent proof  of  good  health,  UQr  even  then  unless  he  ap- 
plies within  a  limited  time.  The  only  exception  to 
this  sweeping  rule  is  the  one  month  grace  allowed  by 
a  few  companies.  The  rule  is  that  once  started, 
the  extended  term  insurance  inexorably  runs  out 
its  stated  course,  expiring  on  a  certain  day,  though 
the  insured  be  then  upon  his  dying  bed.  Even  this 
poor  substitute  for  actual  non-forfeiture  provisions 
has  been  adopted  by  but  few  companies,  the  most 
avoiding  it  on  the  ground  of  ''  adverse  selection." 

Where  extended  insurance  begins  immediately  upon 
the  non-payment  of  premium,  most  companies  per- 
mit the  selection  of  a  paid-up  insurance  for  a  reduced 
amount  instead,  either  at  the  time  of  failure  to  pa^-- 
or  in  some  cases  for  a  limited  period  thereafter.  This 
form  of  surrender  value — namely, paid-up  insurance — 
has  been  the  most  popular  with  companies,  though 
hardly  so  with  the  public,  and  is  now  the  most  com- 
mon value  given.  In  a  majority  of  cases  it  is  not 
given  as  a  matter  of  right,  but  as  a  privilege  to  be 
taken  advantage  of  within  a  few  months  or  else  for- 
ever lost.  How  the  amount  of  this  paid-up  insur- 
ance is  usually  determined  has  already  been  fully 
treated  in  earlier  papers  of  this  series.  It  is  enough 
to  say  at  this  juncture  that  the  paid-up  policy 
granted  is  ordinarily  manifestly  unfair  as  compared 
with  the  values  given  those  who  continue.  It  is 
practically  always  charged  for  at  participating  rates, 
while  in  fact   non-participating.      Some  companies 


131 


have  of  late  changed  the  provisions  of  their  policies, 
so  that  now  paid-up  insurance  begins  by  stipulation 
at  once  upon  lapse,  thus  recognizing  it  as  a  right  in- 
stead of  a  privilege.  Many  companies,  however, 
following  the  course  taken  by  certain  very  large  com- 
panies, require  the  surrender  of  the  policy  and  appli- 
cation to  be  made  for  paid-up  insurance  within  six 
months  after  non-payment,  or  the  right  to  such  paid- 
up  insurance  is  forfeited. 

The  privilege  of  surrendering  policies  for  a  cash 
value  is  confined  in  most  companies  to  the  terminal 
privilege  in  investment  policies.  Otherwise  it  is  re- 
garded as  a  great  favor,  to  be  granted  with  caution 
and  upon  special  occasions  only.  A  few  companies 
have  conceded  the  privilege  of  surrendering  for  cash 
at  intervals  of  one  to  five  j-ears  and  a  very  few  the 
privilege  of  surrendering  for  cash  at  any  time.  The 
Massachusetts  companies  are  compelled  by  the  law 
of  that  Commonwealth  to  grant  cash  values  within 
a  certain  percentage  of  the  full  reserve.  These  com- 
panies are  as  yet  practically  alone  in  regularly  grant- 
ing cash  values  upon  policies  other  than  tontine  or 
accumulated  surplus  contracts.  The  laws  of  the 
same  State  make  paid-up  policies  given  upon  sur- 
render participating  in  future  profits. 

Outside  of  the  Massachusetts  companies,  several 
have  of  late  years  granted  cash  values  after  a  certain 
time  equal  to  the  full  reserves,  such  values  being 
given  only  upon  policies  where  the  surplus  accumu- 
lates and  is  not  paid  upon  surrender. 

One  company,  which  which  was  almost  a  pioneer 
in  this  direction,  on  such  policies  pays  all  dividends 
in  the  form  of  reversionary  additions  for  a  number 


132 


of  years  in  order  to  avoid  the  name  of  tontine,  which 
it  professes  to  abhor;  upon  surrender  before  the  close 
of  the  distribution  period  the  company  allows  the 
full  reserve  as  a  cash  value,  but  forfeits  the  value  of 
all  dividend  additions  as  a  surrender  charge.  The 
same  company  issues  another  policy  in  which  it  ap- 
plies all  surplus  to  accelerate  the  maturity  of  the 
policy  as  an  endowment.  In  that  case  one  gets  no 
benefit  from  the  dividend  if  he  dies;  in  the  former 
case,  he  gets  no  benefit  if  he  surrenders.  Thus  in  sep- 
arate policies  the  twin  advantages  claimed  for  ton- 
tine are  utilized  and  at  the  same  time  all  sin  avoided 
— a  trick  that  reminds  one  of  how  the  two  nuns 
in  Tristram  Shandy  escaped  sin  by  each  pronounc- 
ing a  part  of  the  wicked  word.  In  any  event,  the 
course  of  this  company  in  giving  cash  values  equal 
to  the  reserves,  even  though  the  surplus  be  forfeited, 
has  proven  popular  and  has,  in  consequence,  been 
imitated  by  several  companies,  which  now  adorn 
their  policies  with  columns  of  cash  surrender  values. 
The  nigger  in  the  woodpile  is  of  course  the  forfeited 
surplus;  and  one  small  company  frankly  so  avows 
in  a  policy  wherein  it  tries  to  ride  two  horses  at 
once  by  permitting  either  annual  or  accumulated 
dividends.  The  penalty  it  puts  upon  choosing  the 
former  at  any  time  is  that  all  other  surrender  priv- 
ileges are  abridged  both  in  amount  or  character  and 
the  cash  surrender  entirely  withdrawn.  Not  all  com- 
panies have  this  virtue  of  frankness. 

There  is  almost  as  great  variety  in  loan  as  in  sur- 
render privileges.  A  condition,  formerly  very  com- 
mon, but  now  falling  into  disuse,  provided  for  a  loan 
of  a  definite  proportion  of  the  premium  annually,  or, 


133 


rather,  for  the  acceptance  of  notes  as  part  payment 
of  premiums.  This  plan  was  designated  the  ''pre- 
mium-loan plan,"  although  really  not  a  plan  at  all, 
since  it  was  applied  to  all  plans  in  most  companies. 
These  premium-notes  commonly  bear  interest  at  a 
rate  in  excess  of  the  company's  earnings,  and  at  one 
time  formed  a  considerable  part  of  the  assets  of -many 
companies.  From  the  standpoint  of  security  only 
they  were  justly  regarded  the  safest  possible  invest- 
ment. But  as  such  notes  were  obtained  by  the  repre- 
sentation that  dividends  would  wape  them  out,  their 
accumulation  signified  gross  cause  for  disaffection 
among  the  policyholders.  They  lapsed  in  great  num- 
bers under  the  pressure  of  increasing  cost  and  decreas- 
ing insurance,  leaving  the  notes  and  their  reserves  to 
cross  accounts.  Originally,  in  a  few  instances,  these 
notes  were  binding  against  the  promissors  in  any 
event,  but  latterly  they  have  by  their  terms  been  col- 
lectable only  from  proceeds  of  the  policies. 

Yet  other  companies,  which  have  long  since  dis- 
carded the  delusive  premium  loan  system, make  loans 
for  the  purpose  only  of  sustaining  the  insurance  in 
force.  In  other  words,  they  will  upon  application 
advance  a  premium  or  premiums  to  an  amount 
within  the  reserve  value  and  hold  same  as  a  lien 
against  the  policy.  But  few  companies  make  any 
general  application  of  this  system,  which  in  spite  of 
its  narrowness  commends  itself  as  a  good  feature. 
Others,  following  the  lead  of  a  certain  great  com- 
pany in  a  so-called  special  form  of  policy,  permit  the 
borrowing  of  any  or  all  premiums  after  a  fixed  num- 
ber of  years,  giving  no  privileges  before  that  time. 
This  feature  has  been  made  a  catch  by  agents  to  such 


134 

an  extent  that  it  is  likely  to  have  a  boomerang  ef- 
fect, which  will  be  unfortunate,  as  it  is  really  a  valu- 
able privilege  as  things  go  now-a-days. 

A  verj^  small  number  of  companies,  and  they  for 
the  most  part  what  is  known  as  cash  value  compan- 
ies, stipulate  for  loan  privileges  without  assuming 
any  custodianship  over  the  insured's  affairs,  that  is, 
without  dictating  what  shall  be  done  with  the  money 
borrowed.  These  privileges,  however,  are  made  as 
useless  as  possible  by  the  foolish  restrictions  thrown 
about  them.  In  many  cases  loans  are  not  granted 
except  upon  the  anniversary  of  the  policy,  which 
means,  in  practice,  not  when  the  money  is  needed 
unless  to  pay  premiums.  The  amount  loaned  rarely 
exceeds  three-fourths  the  reserve  and  is  usually  much 
less.  Consequently  under  the  pressure  of  great 
need  for  mone^^,  one  is  strongly  tempted  to  surren- 
der and  get  more.  A  company  can  better  afford  to 
loan  the  full  reserve  and  keep  the  patron  than  pay 
the  full  reserve  and  lose  him;  its  own  paper  should  be 
a  good  security  for  all  it  will  pay  for  it.  One  com- 
pam^  has  partially  recognized  this  hj  agreeing  to 
loan  at  the  end  of  five-year  periods  the  full  reserve; 
but  between  the  periods  the  amount  loaned  does  not 
increase.  So  this  is  no  more  than  a  hint  of  what 
ought  to  be. 

Perhaps  nothing  more  thoroughly  illustrates  the 
view  taken  by  companies  that  the  foregoing  are 
privileges  and  not  rights  than  the  fact  that  without 
exception  it  is  stipulated  that  no  surrender  value  or 
loan  will  be  allowed  until  after  a  specified  period. 
Be  this  period  long  or  short — and  it  is  commonly 
long  enough— to  insist  upon  it  is  to  insist  that  what 


135 

is  granted  is  not  a  man's  right  to  his  own,  but  a  con- 
cession of  what  he  is  in  no  wise  entitled  to.  For  to 
take  the  former  view  would  be  to  stultify  the  condi- 
tion, since  to  render  to  another  what  is  his  is  but 
one's  bounden  duty  at  all  times  without  unreason- 
able delay. 

The  cause  of  this  condition  is  no  more  honorable 
to  companies  than  is  the  fact.  For  it  has  been 
adopted  in  order  to  shield  companies  in  paying 
larger  first  year's  commissions  than  first  year's 
premiums  justify.  Not  daring,  or,  at  least,  not  car- 
ing to  render  a  true  account  of  such  outlay,  compan- 
ies have  adopted  the  subterfuge  of  refusing  any  sur- 
render value  until  the  cost  of  obtaining  the  insurance 
has  been  covered  without  trenching  upon  the  re- 
serve. 


136 


POLICY  CONTRACTS.— SURPLUS  CONDITIONS. 

Though  the  methods  of  determining  the  surplus 
belonging  to  a  policy  have  already  been  described,  it 
is  perhaps  wise  to  preface  this  paper  by  a  simple  for- 
mula, adapted  to  any  policy,  viz:  to  the  accumulation, 
if  any,  at  the  beginning  of  the  year  add  the  premium 
or  premiums  as  received;  improve  the  sum  at  the  rate 
of  interest  actually  earned  by  the  company;  from  the 
amount  thus  obtained  deduct  the  policy's  share  of  the 
company's  actual  expenses  and  also  its  net  share  of 
losses  determined  by  its  actual  insurance,  or  the  differ- 
ence between  the  face  of  the  policy  and  its  accumulated 
value.  The  remainder  will  be  the  present  value  of  the 
policy,  or  the  fund  actually  accumulated  because  of 
it.  Deduct  from  this  the  net  reserve  required  by  the 
company's  standard  (not  less  than  the  legal  reserve) 
and  the  remainder  is  surplus,  not  being  required 
to  fulfill  the  purposes  of  the  policy.  That  it  is  sur 
plus  belonging  to  the  policy  is  not  so  sure,  since  by 
agreement  its  eventual  ownership  may  be  conditional. 
That  it  has  been  contributed  by  the  policy  is  likewise 
doubtful,  since  the  policy  may  before  its  term  expires 
result  in  a  loss  instead  of  a  profit.  But  the  amount 
thus  determined  is  for  the  present  an  apparent  con- 
tribution from  the  policy's  premiums  and,  if  surplus 
is  now  to  be  divided,  it  should  be  declared  to  that 
policy.  If  division  of  surplus  is  deferred,  the  ac 
count  can  be  carried  along  and  either  augmented  by 


137 

the  withdrawal  of  others  or  cancelled  by  the  surren- 
der of  the  policy.  But  when  division  is  actually  made, 
it  is  or  should  be  made  in  precise  accord  with  this 
formula. 

In  order  to  veil  departures  of  greater  or  less  im- 
portance from  this  method,  companies  have  seen  fit 
to  invest  the  apportionment  of  surplus  with  an  air  of 
impenetrable  mystery.  Upon  it  the  skill  of  the  actuary 
must  be  directed  and  none  but  adepts  is  thought  able 
to  comprehend  the  workings  of  his  scientific  hand. 
The  uninitiated  are  supposed  to  accept  the  findings 
with  a  feeling  of  grateful  awe;  w^hich  they  do — but 
not  without  distrust. 

Means  of  witholding  an  ample  surplus  even  on  an- 
nual dividend  plans  have  already  been  suggested  in 
the  simple  expedient  of  deferring  payment  of 
dividends  one  or  more  years  after  same  have  been 
earned.  Tontine  and  other  accumulated  dividend 
plans  ofcourse  render  even  this  expedient  unnecessary, 
since  the  very  essence  of  such  contracts  is  the  piling 
up  of  surplus.  No  excuse  is  manifest,  therefore,  for 
deducting  aught  from  the  amounts  due  by  the  for- 
mula already  given,  and  yet  less  excuse  for  refusing  a 
fair  accounting  when  desired.  Nevertheless,  no  less 
than  twelve  companies,  among  which  are  several  of 
the  great  institutions  of  international  repute,  insert 
in  fine  type  in  their  applications  the  following  pledge: 
'*  That  in  any  distribution  of  surplus  or  profits  the 
principles  and  methods  which  may  be  adopted  by 
said  company  for  such  distribution,  and  its  deter- 
mination of  the  amount  equitably  belonging  to  any 
policy  which  may  be  issued  under  this  application, 
shall  be  and  are  hereby  ratified  and  accepted  by  and 


138 


for  every  person  who  shall  have  or  claim  any  interest 
under  such  policy."  One  of  the  great  companies  has 
but  lately  become  ashamed  of  this  cumbrous  clause, 
which  sounds  like  the  incisive  words- of  a  judgment 
note,  and  so  have  improved  it  as  follows:  ''  That 
the  distribution  of  surplus  which  may  be  adopted 
and  approved  by  the  society  is  hereby  accepted  by 
me  in  my  own  behalf  and  for  every  person  who 
shall  have  any  interest  in  the  policy  now  applied 
for." 

It  will  be  observed  that  in  both  these  agreements 
the  applicant  approves  not  merely  present  methods, 
of  which  he  conceivably  might  know  something,  but 
methods  to  be  as  well,  of  which  surely  no  one  has 
any  knowledge. 

This  uncertainty  is  by  almost  all  other  companies 
transferred  to  the  policies  and  there  appears  in  vague 
clauses  about  **  Surplus  then  apportioned"  or  ** pro- 
fits then  determined"  or  equally  unmeaning  phases. 
One  large  company,  and  one  only,  openly  stipulates 
in  the  policy  for  similar  approval  of  the  company's 
future  action  to  that  demanded  in  the  applications 
mentioned;  but  the  most  of  them  dodge  the  issue. 
Among  companies  doing  an  annual  dividend  business 
only,  there  is  often  silence  on  the  entire  subject,  no 
mention  of  dividends  anywhere.  One  great  com- 
pany refers  the  insured  to  its  charter  for  instructions 
in  that  regard.  Copies  of  its  charter  are  not  readily 
available  to  the  public;  but,  if  an  Iowa  policyholder 
lately  in  the  courts  against  the  company  is  to  be  be- 
lieved, this  company  is  supposed  to  divide  all  surplus 
above  a  fixed  amount.  It  is  to  be  feared  that  the 
company  misreads  that  ancient  document,  as    the 


139 


general  surplus  seems  vastly  to  exceed  the  amount 
specified. 

But  one  of  all  the  companies  endeavors  to  give  any- 
clear  agreement  as  to  the  dividend  it  will  pay.  Its 
agreement,  though  marred  by  too  many  qualifica- 
tions, is  so  much  superior  to  any  other  that  it  should 
be  inserted  here:  ''  This  policy  shall,  if  kept  in  force, 
share  in  the  surplus,  according  to  the  company's  us- 
age, at  each  distribution  after years  from  the  date 

hereof,  until  all  contributions  to  the  surplus  found  in 
the  course  of  making  such  distributions  to  have 
arisen  from  this  policy  shall  have  been  returned;  but 
no  dividend  shall  be  pa3^able  at  or  after  the  time  de- 
fault may  be  made  in  the  payment  of  any  premium." 

The  fact  that  long-term  dividend  plans  in  point  of 
time  succeeded  annual  dividend  plans  embarrassed 
with  a  past  the  companies  adopting  the  new  plans. 
For  they  felt  it  incumbent  upon  them  to  so  write 
their  new  contracts  as  to  make  them  intelligible  in 
some  sense  to  their  old  patrons.  Therefore  the  system 
adopted  by  each  company  was  its  own  adaptation 
to  the  prevailing  modes  of  expression  and  thought. 
A  more  or  less  definite  analysis  of  the  sources  of  ex- 
tiaordinary  profit  was  commonly  given  in  the  poli- 
cies. New  and  very  peculiar  phrases  came  to  be  used 
in  this  connection,  such  as  '*  profits  from  lapses"  and 
most  especially  ''profits  from  losses,"  all  meant  to  ex- 
press the  very  simple  idea  that  all  profits  should  be- 
long to  the  policies  in  force  when  dividends  were  de- 
clared. Awkward  methods  of  putting  this  proposi- 
tion are  not  yet  out  of  vogue  entirely,  although  the 
leader  in  this  form  of  policy  has  long  since  eschewed 
all  unnecessary  verbiage,  saying  only  ''shall  partici- 


140 

pate  in  the  accumulated  surplus  derived  from  policies 
on  the  tontine  plan,  both  existing  and  discontinued,  as 
may  then  be  apportioned. "  One  company  at  least  gives 
a  circumstantial  account  of  how  such  surplus  is  to 
be  derived,  dividing  its  policies  into  classes  according 
to  year  of  termination  of  dividend  period.  It  takes 
the  precaution,  however,  of  binding  the  insured  by 
his  application  to  accept  whatever  it  may  offer.  An- 
other company  proposes  to  calculate  dividends  an- 
nually and  purchase  therewith  simple  or  pure  en- 
dowments, all  due  at  a  certain  time.  This  to  a  de- 
gree only  is  supposed  to  give  a  *' profit  from  losses," 
as  it  is  called— to  a  degree  only,  because  pure  en- 
dowment rates  are  calculated  usually  on  a  low 
mortality  table.  Such  rates  are  presumably  loaded 
and  are  certainly  based  on  less  interest  expectation 
than  the  actual,  thus  giving  scant  value  in  both  par- 
ticulars unless  participating  themselves,  which  is  not 
stipulated.  Such  endowments,  though  full-paid, 
are  also  forfeited  upon  non-payment  of  premium  on 
the  original  policy,  though  no  corresponding  gain  is 
given  upon  persistency. 

Almost  all  companies  now  stipulate  for  cash  divi- 
dends, but  one  or  two  declaring  reversionary  divi- 
dends with  cash  privileges  and  a  few  more  permitting 
the  choice  of  reversionary  dividends  without  re-ex- 
amination either  in  the  application  or  under  strict 
conditions  at  a  later  date.  One  company  permits  the 
selection  of  reversionary  dividends  when  the  first 
dividend  is  declared,  if  then  in  good  health. 

On  long-term  dividend  contracts  it  has  come  to  be 
customary  to  allow  several  options  as  to  the  disposi- 
tion of  the  surplus  and,  in  fact,  of  the  entire  value  of 


141 

the  policy  in  most  cases.  The  options  usually  in- 
clude cash  and  reversionary  privileges  together 
v^ith  the  right  of  annuity  conversion;  similar  privi- 
leges are  conceded  in  the  disposition  of  the  entire 
proceeds  of  the  policy,  if  desired.  Stipulations  for 
re-examination  in  case  the  amount  of  insurance  is  in- 
creased are  usual,  but  not  universal.  Some  compan- 
ies also  permit  the  total  cash  value,  or  part  thereof, 
to  stand  as  a  combined  paid-up  policy  for  its  face  and 
an  annuity  equal  to  3,  3V2  or  4  per  cent,  upon  the 
amount,  thus  converting  by  a  subtle  casuistry  insur- 
ance into  pure  investment.  Even  this  is  not  sufficient 
in  all  cases,  and  by  a  peculiar  jugglery  the  income  is 
made  to  appear  to  be  5,  6,  7  or  even  10  per  cent.,  the 
additional  being  paid  for  by  the  collection  of  a  sufficient 
deferred  annuity  premium  as  a  part  of  the  original 
premium.  All  possible  efforts  are  put  forih  to  make 
these  options  attractive  to  the  patron  who,  how- 
ever, upon  one  or  the  other  will  get  but  fair  value  for 
his  money  and  ought  to  expect  no  more. 


142 


INSTALMENT,  ANNUITY  AND  TRUST  CON- 
TRACTS. 

The  fact  that  the  Yalue  of  a  man's  life  cannot  be 
adequately  expressed  in  a  lump  sum  is  especially  evi- 
dent when  the  person  interested  in  the  life  depends 
upon  the  man  not  merely  for  an  income,  but  for 
proper  directions  as  to  the  care  and  use  of  it.  The 
immediate  expression  of  a  husband's  value  to  his 
v^ife  in  a  financial  sense  is  the  income  he  affords  her, 
assured  against  all  contingencies  except  his  ow^n  dis- 
ability or  death  and  protected  against  herself  by 
care  and  caution  and  by  the  very  nature  of  the  case 
not  subject  to  discount  or  w^aste.  A  life  policy  is  in- 
tended to  cover  the  contingency  of  death  and  other 
forms  of  insurance  as  yet  imperfectly  cover  the  con- 
tingencies of  temporary  and  permanent  disability. 
But  since  life  insurance  is  to  indemnify  a  loss,  it  should 
in  such  cases  provide  an  income  of  the  same  nature 
and  with  similar  safe-guards.  This,  it  is  now  gener- 
ally understood,  the  mere  payment  of  a  lump  sum 
upon  the  death  of  the  insured  utterly  fails  to  do  in  a 
large  majority  of  cases.  For  such  sum  is  at  once  at 
the  disposal  of  the  beneficiary,  subject  to  losses  in 
investment,  to  waste,  to  loss  by  over-confidence  in 
others,  to  seizure  by  creditors,  and,  though  escaping 
aH  these,  to  constant  diminution  by  use. 

The  ingenuity  of  actuaries  was  long  ago  brought  to 
bear  upon  this  problem,  and  in  England,  at  least, 
what  is  known  as  survivorship  annuities  have  shared 


143 

the  general  popularity  of  life  annuities.  These  con- 
tracts, now  issued  by  but  few  American  companies 
and  rarely  by  them,  provide  for  the  payment  of  an 
annuity  for  life  to  a  certain  person  from  and  after 
the  death  of  another.  It  is  purchasable  at  a  level 
annual  premium  upon  either  of  two  tables,  one  pro- 
viding for  the  return  of  premiums  in  event  of  the  prior 
death  of  the  beneficiary  and  one  having  no  such  pro- 
.  vision.  These  contracts  provide  the  desired  income 
for  the  entire  life  of  the  beneficiary  and  the  income 
might  be  made  inalienable  by  a  stipulation  against 
its  negotiation.  Such  a  contract  would,  however, 
be  the  absolute  property  of  the  beneficiary,  and  as 
such  subject  to  sale  under  execution  for  her  creditors, 
the  same  as  any  other  bond.  Unless  coupled  with  a 
condition  of  non-negotiability,  it  could  be  sold  or 
pledged  at  will;  and  not  even  an  agreement  of  that 
sort  could  operate  to  prevent  the  company  and  bene- 
ficiary agreeing  to  cancel  the  contract  for  a  consider- 
ation. It  is  doubtful  whether  an  agreement  on  the 
part  of  the  company  not  to  purchase  would  be  good 
after  the  death  of  the  insured;  for  then,  at  least,  the 
company  and  beneficiary  are  principals  to  the  con- 
tract, and  may  alter  it  by  agreement  in  that  respect 
and  any  other.  An  objection  which  has  probably 
proven  most  completely  fatal  to  the  popularity  of 
these  contracts  is,  that  upon  the  death  of  the  specified 
beneficiary  the  insurance  ceases,  while  the  value  of 
the  life  insured  is  unimpaired,  and  the  only  change  is 
that  it  has  inured  to  another  person's  benefit.  This 
is  particularly  enforced  upon  men's  minds  by  the  fact 
that  at  such  a  juncture  insurance  may  not  be  attain- 
able because  of  altered  health  conditions. 


144 


Within  the  past  decade,  and  under  various  names 
and  pretentions,  a  plan  to  provide  an  income  by  mak- 
ing policies  payable  in  instalments  has  been  intro- 
duced to  the  public,  often  with  a  flourish  of  trumpets 
as  if  something  wonderful  had  been  discovered.  One 
company,  at  least,  made  no  change  in  existing  policies, 
except  to  add  a  memorandum  agreeing  to  pay  the 
principal  sum  in  a  specified  number  of  equal  instal- 
ments, crediting  all  balances  with  the  net  average  in- 
terest earned  by  the  company  and  paying  accrued 
interest  with  each  instalment.  One  or  two  others 
used  a  similar  memorandum,  except  that  interest 
was  not  paid  in  addition  to  instalments  but  was 
used  to  lengthen  the  term  of  payments.  In  both 
cases  there  was  usually  a  stipulation  in  the  contract 
that  the  policy  should  not  be  negotiable— a  stipula- 
tion, which,  however,  is  in  the  case  of  notes  con- 
sidered beneficial  to  the  payer  and  which  certainly 
might  be  done  away  with  by  agreement. 

Yet  other  companies  issued  new  forms  of  policy, 
promising  directly  to  pay  a  certain  sum  per  annum 
for  a  certain  number  of  years.  For  such  policies  a 
premium  was  collected  suflicient  to  furnish  an  insur- 
ance equal  to  the  present  value  of  such  instalments 
discounted  to  the  dateof  payment  of  first  instalment. 
The  rate  of  discount  is  usually  4  per  cent,  and  the 
actual  insurance  is  not  the  sum  of  the  instalments, 
but  the  discounted  value.  These  plans  furnish  a 
definite  income,  but  one  not  certain  to  endure  so  long 
as  required  or  for  the  life  of  the  beneficiary,  so  as  to 
adequately  indemnify  the  financial  loss  occasioned  by 
the  death  of  husband  or  father.  In  fact,  such  pro- 
visions are  not  more  likely  to  fulfill  the  required  con- 


145 


ditions  cf  permanency,  certamt\^,  impregnability  and 
non-negotiability  than  would  be  the  payment  ot  a 
lump  sum.  For  it  is  certainly  possible  that  with  a 
sufficient  cash  estate  one  might  provide  for  one's-self 
an  income  for  life,  however  long,  while  an  instalment 
provision  is  certain  by  its  terms  to  fail  after  a  com- 
paratively short  period.  Any  endeavor  to  continue 
a  control  over  w^hat  shall  be  done  with  this  income 
after  the  insured's  decease  by  stipulations  for  rever- 
sions, forfeitures  or  change  of  beneficiaries  are  futile. 
Upon  the  death  of  the  insured  such  a  contract  be- 
comes the  personal  property  of  the  beneficiary,  who 
assumes  the  position  of  one  principal  to  the  contract. 
A  stipulation  that  the  contract  shall  not  be  nego- 
tiable would  operate  to  prevent  him  from  disposing 
of  the  same;  but,  having  once  come  into  possession, 
the  ownership  cannot  be  taken  from  him  and  trans- 
ferred to  another  by  any  stipulation  in  the  contract. 
Despite  any  condition  to  the  contrary,  the  death  of 
the  beneficiary  after  the  death  of  the  insured  will  re- 
sult in  the  passing  of  the  title  to  the  heirs  of  his 
estate.  The  entail  of  property,  personal  or  real,  is 
strictly  forbidden  both  by  constitutional  and  legal 
provisions  and  will  in  all  cases  be  declared  void  by 
the  courts. 

Some  companies  issuing  instalment  policies,  or 
policies  having  attached  to  them  instalment  memo- 
randa, are  by  their  charters  compelled  to  pay  all 
death  claims  within  a  specified  time  after  the  receipt 
of  proofs  of  loss;  in  which  case  it  would  seem  doubt- 
ful whether  an  instalment  contract  would  be  sus- 
tained at  law  at  all.  The  right  of  companies  to  act 
as  banks  of  deposit,  crediting  interest  on  funds  left 


146 

iii  their  hands  after  the  decease  of  the  insured,  is  also 
questionable;  and  it  is  not  clear  that  a  claim  of  that 
nature  would  have  standing  in  the  courts. 

In  instalment  contracts  such  as  have  been  described, 
there  are  commonly  provisions  for  commuted  or  dis- 
counted values  after  the  death  of  the  original  bene- 
ficiary. 

One  life  insurance  company,  which  has  by  its  char- 
ter the  right  to  act  as  trustee,  calls  an  instalment 
contract  issued  by  it  a  ** trust  certificate,"  and  ex- 
pressly agrees  that  the  carrying  out  of  the  instalment 
provisions  shall  be  a  trust.  In  that  case,  if  the  clause 
has  any  legitimate  meaning,  the  company  is  during 
the  lifetime  of  the  designated  beneficiary  his  trustee, 
which  would  probably  operate  to  remove  the  policy 
from  his  control  and  from  the  reach  of  creditors  claim- 
ing through  him.  That  such  is  the  intent,  however, 
is  not  clearly  indicated  by  the  words  of  the  contract, 
and  the  company  in  question  does  not  report  trust 
items  among  its  liabilities. 

Another  company,  which  operates  a  trust  depart- 
ment under  its  own  charter,  lias  a  contract  designat- 
ing such  department  as  trustee  for  the  beneficiaries, 
and  is  thus  enabled  to  make  an  agreement  to  hold 
the  proceeds  of  the  policy  in  trust,  paying  over  a  cer- 
tain amount  each  year,  and  accumulating  the  re- 
mainders at  a  fixed  interest.  Such  an  agreement 
makes  thecompany  in  its  dual  capacity  both  princi- 
pals to  the  contract,  vests  in  it  the  title  to  the  policy 
and  its  proceeds  and  only  the  use  thereof  in  the  bene- 
ficiary and  the  reversion  after  the  ofiices  of  the  trust 
have  been  performed  in  the  insured.  This  makes  the 
beneficiary,  or  cestui  qui  trust  as  he  is  now  called. 


147 

a  passive  person,  acquiring  the  title  to  each  payment 
as  it  is  received  and  not  before.  Of  course  he  cannot 
alienate  what  he  does  not  own,  nor  can  his  creditors 
seize  what  is  not  his;  so  the  provision  for  his  future 
cannot  be  destroyed  by  any  act  of  his.  The  safety  of 
the  fund  is  by  the  charter  guaranteed  by  the  assets 
of  the  trust  department  and  the  capital  of  the  com- 
pany, but  not  by  the  assets  of  the  insurance  depart- 
ment. Whether  the  income  from  such  a  fund  would 
last  throughout  the  life  of  the  cestui  qui  trust  would 
depend  upon  the  amount  of  income,  rate  of  interest 
and  amount  of  fund.  Unless  the  income  were  limited 
to  about  the  annual  interest,  the  estate  might  easily 
fail  to  accomplish  the  desired  end. 

Another  very  large  compan3%  which  has  by  its  charter 
trust  powers,  attaches  to  its  policies  a  trust  memoran- 
dum creating  in  itself,  not  a  trust  of  the  policy,  but  an 
executory  and  revocable  trust  in  the  proceeds  there- 
of for  the  benefit  of  the  designated  cestui  qui  trust 
and  with  reversion  to  the  insured.  The  trustee  is 
instructed  to  pay  from  the  fund  a  designated  sum 
annually  until  all  is  expended  and  agrees  to  credit 
interest  at  not  less  than  a  certain  rate  per  cent.  It 
is  held  that  such  trusts  are  first  liens  against  its  en- 
tire assets,  it  being  a  mutual  company.  The  effect  of 
the  trust,  being  executory,  is  that  the  title  to  the 
policy  is  potentially  in  the  insured  until  his  death; 
and  the  effect  of  that  might  be  to  avoid  the  trust  in 
favor  of  the  creditors  of  his  estate. 

Any  policy  which  can  be  put  into  negotiable  con 
dition  can  be  utilized  to  accomplish  the  purpose  more 
effectively  than  any  of  the  forego mg,  by  assigning 
the  same  to  a  trustee  with  instructions  to  at  once 


148 


invest  the  proceeds  thereof  in  an  annuity  upon  the 
life  of  the  cestui  qui  trust,  but  in  the  name  of  the 
trustee,  such  trustee  to  receive  and  pay  over  to  the 
cestui  qui  trust  the  annuity  instalments.  This  will 
provide  an  income  for  the  whole  life  of  the  benefici- 
ary, the  amount  of  the  income  increasing,  the  longer 
the  original  insured  lives.  The  intervention  of  the 
trustee  effectually  prevents  the  alienation,  discount 
or  pledge  of  the  income  or  its  seizure  by  creditors. 
As  it  becomes  an  executed  trust  at  once,  the  policy 
cannot  be  seized  for  debts  of  the  estate  unless  the  in- 
sured was  insolvent  when  the  assignment  was  made. 
As  the  policy  and  annuity  contracts  are  both  assets 
easilj^  distinguishable,  the  failure  of  the  trustee  would 
result  only  in  the  contracts  being  turned  over  by  the 
court  to  a  new  trustee  and  the  carr^nng  out  of  the 
trust  by  him.  The  only  point  of  risk  would  be  the 
company  issuing  the  insurance  and  annuity  con 
tracts,  and,  of  course,  great  care  should  always  be 
used  in  selecting  it. 


149 


APPENDIX. 

Sample  of  simple  form  of  annual  dividend  policy. 

No.  100,000.  Amount,  $10,000. 

Age,  35.  Premium,  $271. 

THE  LIFE  INSURANCE  COMPANY  OF    CHICAGO, 

in  consideration  of  two  hundred  seventy-one  dollars 
and  the  payment  of  a  like  sum  on  the  first  day  of 
July  every  year  during  the  continuance  of  this  policy, 

PROMISES  TO   PAY, 

upon  proof  of  the  fact  and  manner  of  death  of  John 
Doe 

TEN  THOUSAND  DOLLARS 

to  Mary  Doe,  his  wife,  or,  in  event  of  her  prior  death, 
to  the  executors,  administrators  or  assigns  of  the 
insured. 

John  Doe  is  hereby  made  a  member  of  this  mutual 
company,  which  further  agrees  to  receive  the  premi- 
ums upon  this  policy,  to  improve  the  same  at  the 
actual  net  average  rate  of  interest  earned  on  the 
mean  assets  of  the  company,  to  deduct  at  the  close 
of  each  polic3^  year  the  actual  cost  of  the  net  insur- 
ance furnished,  to  reserve  for  reinsurance  such  an 
amount  as  may  be  required,  and  to  return  annually 
to  the  holder  of  this  policy,  in  cash  or  an  equivalent 
paid-up  insurance  as  he  may  elect,  the  surplus  of  this 
fund. 

The  company  will  loan  the  holder  of  this  policy  in 
an  amount  not  exceeding  its  then  reserve,  upon  tfie 


150 

security  of  the  policy,  and  will  prefer  such  securities 
in  making  loans;  but  one  annual  premium  must  be 
paid  in  advance  from  proceeds  of  such  loan. 

The  failure  to  pay  a  premium  when  due  shall  be 
construed  to  be  an  application  for  such  a  loan  in  the 
amount  of  the  premium,  such  advance  to  bear  six 
per  cent  interest,  payable  annually;  and  if  the  value 
of  the  policy  exceeds  the  net  amount  due  (that  is,  the 
premium  less  any  abatement  by  surplus),  the  policy 
shall  be  continued  in  force  subject  to  a  lien  for  amount 
advanced  and  interest  thereon.  If  the  value  is  less 
than  the  net  amount  required,  the  value  shall  be  ap- 
plied to  continue  the  insurance  at  the  one-year  term 
rates  of  the  company. 

Upon  the  surrender  of  this  policy  at  any  time  the 
company  will  pay  its  net  cash  value,  provided  that 
the  company  may  demand  reasonable  notice  of  with- 
drawal; or  instead  of  cash  the  holder  may,  at  his  op- 
tion, take  the  equivalent  value  in  paid-up  insurance, 
in  continued  insurance,  in  a  life  annuity,  or  an  an- 
nuity for  a  term  of  years. 

Notice  of  any  assignment  must  be  given  the  com- 
pany, and  proof  of  interest  will  be  required. 

Executed  at  Chicago  July  1,  1893. 


Simple  form  of  deferred  dividend  policy. 
No.  100,000.  Amount,  $10,000. 

Age,  35.  Premium,  $271. 

THE  LIFE   INSURANCE  COMPANY  OF  CHICAGO, 

in  consideration  of  two  hundred  seventy- one  dollars 
and  the  payment  of  a  like  sum  on  the  first  day  of 
July  every  year  during  the  continuance  of  this  policy, 


151 


Upon  proof  of  the  fact  and  cause  of  death  of  John  Doe, 

TEN  THOUSAND  DOLLARS 

to  Mary  Doe,  his  wife,  or,  in  event  of  her  prior  death, 
to  the  executors,  administrators  or  assigns  of  the 
insured. 

John  Doe  is  hereby  made  a  member  of  this  mutual 
company,  which  further  agrees  to  receive  the  premi- 
ums upon  this  policy,  to  improve  the  same  at  the 
actual  net  rate  of  interest  earned  upon  the  mean 
assets  of  the  company,  to  deduct  at  the  close  of  each 
policy  year  the  actual  cost  of  the  net  insurance  fur- 
nished, and  to  continue  this  accumulation  for  twenty 
3^ears,  at  the  close  of  which  period,  if  the  insured  be 
then  living  and  this  policy  in  force,  the  company  will, 
at  the  option  of  the  holder,  either  redeem  this  policy 
by  paying  the  entire  accumulation  in  cash  or  by 
issuing  an  equivalent  paid-up  life  policy,  or  by  issuing 
an  equivalent  paid-up  annuity  for  life  or  a  term  oi 
years,  or  w^ill  permit  this  policy  to  be  continued  for 
a  second  accumulation  term  often,  fifteen  or  twenty 
years,  and  will  pay  over  any  excess  of  the  accumu- 
lated value  of  this  policy  over  its  reserve,  either  in 
cash  or  in  an  equivalent  paid-up  addition  to  this 
policy,  or  in  a  paid-up  annuity  for  life  or  a  term  of 
years. 

The  company  will  loan  the  holder  of  this  policy  in 
an  amount  not  exceeding  its  then  accumulated  value, 
upon  the  security  of  the  policy,  and  will  prefer  such 
securities  in  making  loans;  but  one  annual  premium 
must  be  paid  in  advance  from  the  proceeds  of  such 
loan. 

The  failure  to  pay  a  premium  when  due  shall  be 


152 


construed  to  be  an  application  for  such  a  loan  in  the 
amount  of  the  premium,  such  advance  to  bear  six 
per  cent  interest,  payable  annually;  and  if  the  value 
of  the  policy  exceeds  the  amount  of  the  premium,  the 
policy  shall  be  continued  in  force  subject  to  a  lien  for 
the  amount  advanced  and  interest  thereon.  If  the 
value  is  less  than  the  premium,  it  shall  be  applied  to 
continue  the  insurance  in  force  at  the  one-year  term 
rates  of  the  company. 

Upon  the  surrender  of  this  policy  at  any  time  the 
company  will  pay  its  net  cash  value,  provided  that 
the  company  may  demand  reasonable  notice  of  with- 
drawal. 

Notice  of  any  assignment  must  be  given  the  com- 
pany, and  proof  of  interest  will  be  required. 

Executed  at  Chicago,  July  1,  1893. 


Sample  form  for  trust  assignment  to  secure  income. 

I  hereby  assign  to  the  Equitable  Trust  Company, 
a  corporation  incorporated  under  the  laws  of  Illinois, 
and  with  its  principal  office  at  Chicago,  all  my  inter- 
est in  policy  No.  100,000  on  my  life  in  the  Life  Insur- 
ance Company  of  Chicago,  in  trust,  however,  for 
Mary  Doe,  my  wife,  and  on  the  following  conditions: 

If  the  said  Mary  Doe  shall  survive  me,  the  said 
Equitable  Trust  Company  shall  collect  the  proceeds 
of  the  said  policy  of  insurance,  and  shall  purchase 
therewith  from  the  said  Life  Insurance  Company  of 
Chicago  an  annuity  for  the  life  of  the  said  Mary  Doe, 
but  in  the  name  of  the  said  Equitable  Trust  Com- 
pany as  trustee  for  the  said  Mary  Doe;  and  the  said 
Equitable  Trust  Company  shall  collect  the  instal- 
ments upon  the  said  annuity  as  the  same  shall  be- 


153 


come  due  and  payable,  and  after  deducting  a  fee  oi 
two  per  cent  thereon  shall  pay  the  same  over  to  the 
said  Mary  Doe  on  the  first  day  of  the  month  next 
succeeding  the  date  of  such  collection.  In  event  of 
the  death  of  the  said  Mary  Doe  or  of  her  legal  sepa- 
ration from  me,  this  deed  of  trust  shall  be  void,  and 
the  said  Equitable  Trust  Compan^^  shall,  upon  re- 
ceipt of  a  fee  of  twenty-five  dollars,  reassign  the  said 
policy  of  life  insurance  to  me. 

Executed  at  Chicago  July  1,  1893,  and 

Accepted  at  Chicago  July  1,  1893. 


155 


TABLE  OF  CONTENTS. 

INSURANCE  IN  GENERAIv Pages  3—7 

Mutual  burden-bearing.  Indemnification.  Rates  made  by 
application  of  rules  of  average.  Hazard  in  health  and  life  in- 
surance an  increasing  one.  Real  insurance  is  only  against  pre- 
mature death.  Cancellation  by  company  not  admissible.  Con- 
sequently care  both  in  drawing  up  contracts  and  in  selecting 
risks.  Tendency  in  England  to  less  strict  requirements  as  to 
health,  in  this  country  to  more.  Classification  is  desirable.  In- 
surance is  to  indemnify  loss.  Interest  is  pre-supposed.  Amount 
of  insurance  should  be  limited  to  value  to  beneficiary.  Insur- 
ance on  life,  limited-payment  and  endowment  plans  automatic- 
ally adjust  to  diminishing  value  of  life. 

VITAIv  STATISTICS Pages  8—20 

Very  accurate  statistics  desirable.  Public  demands  a  policy 
which  cannot  be  terminated  by  company.  Hence  company 
must  be  more  cautious  about  its  agreements.  Assessment  insur- 
ance only  an  apparent  exception.  Mortality  tables  must  cover 
the  whole  period  of  life.  Benefit  of  selection  lost  in  five  years. 
Companies  must  expect  the  average  mortality  of  the  country. 
Company  must  fix  the  rate  for  each  year  in  advance.  Statistics 
covering  thousands  of  lives  needed.  First  compilation  was  by 
John  Graunt  in  16G2.  More  complete  tables  by  Edmund  Hailey 
in  1693.  Insurance  had  begun  in  crude  attempts.  Good  tables 
in  1742  by  Johann  Peter  Suessmilch,  by  Menander  in  1741.  In 
1765  the  Equitable  Life  Insurance  Institution  started  in  London 
on  mutual  principle.  In  1815  Milne  compiled  tables  from  ex- 
perience of  city  of  Carlisle.  Later  the  Actuaries'  tables  from 
experience  of  seventeen  companies.  American  experience 
tables  from  experience  of  Mutual  Life,  compiled  by  Sheppard 
Homans.  Limit  of  life  placed  arbitrarily  at  95  or  100.  Meech's 
tables,  compiled  from  experience  of  thirty  American  companies. 
No  resulting  attempt  to  classify  risks.  Arbitrary  standards 
adopted  first  by  Massachusetts,  then  by  nearly  all  States.  Elizur 
Wright  did  not  consider  the  Actuaries'  table  a  final  standard. 
He  was  collecting  American  experience.  Error  in  Wright's 
view.  Gain  in  mortality  is  absolute,  not  temporary.  Variations 
of  Meech's  tables  from  others  small  because  of  assumed  limit  of 
life.  One  company  reduced  rates  for  a  time.  Actuaries'  and 
American  Experience  tables  now  used  by  all  authorities.    Actu- 


156 

ries'  table  given  with  rates  of  mortality  at  different  ages  and  also 
terms  of  expected  life. 

RATB-MAKING— TERM  AND   NATURAL   PRE- 
MIUM   Pages  21—20 

Insurance  a  year  at  a  time.  Formula  for  natural  premium. 
Natural  premium  simplest  plan,  but  last  to  come  into  use. 
Is  not  now  generally  understood.  Sheppard  Roman's  term 
plan.  Construction  of  rates.  Present  imitation  of  level  pre- 
mium. Formula  for  single  premium  for  term  insurance.  For- 
mula for  level  annual  term  premium.  Use  of  present  value  of 
an  annuity  of  one  dollar.     Loading. 

RATE-MAKING-WHOLE  LIFE Pages  27—30 

Eventual  death  certain.  Hence  whole  life  policy  covers  cer- 
tainty as  well  as  chance.  The  time  of  death  only  is  uncertain. 
Calculation  of  (1)  when  amounts  of  insurance  must  be  paid,  (2) 
net  present  amount  in  hand  necessary  to  pay  them,  (3)  what  sum 
each  must  pay  in  now  to  make  up  this  amount,  (4)  present  value 
of  an  annuity  of  one  dollar,  (5)  what  annual  amount  is  equiv- 
alent to  single  premium  required.  Use  of  commutation  and 
logarithmic  tables.     Loading. 

RATE-MAKING  —  LIMITED    PAYMENT    LIFE 

AND   ENDOWMENT Pages  31—36 

Endowment  the  opposite  of  life  insurance.  Combining  the 
two.  Attracts  the  best  lives.  Analysis  of  rates  for  pure  endow- 
ment. Combined  with  term  rates  gives  endowment  insurance 
premium.  Semi-endowment  premiums.  Limited-payment  life 
policies  really  term  insurance  combined  with  an  endowment 
equal  to  net  single  premium  at  close  of  term.  The  single  pre- 
mium for  such  a  policy  and  for  a  whole  life  policy  necessarly 
the  same.  Gain  because  of  lower  death  rate  in  endowment  in- 
surance. Endowment  insurance  not  the  same  as  carrying  terim 
insurance  and  investing  the  remainder  of  the  premium  else- 
where.    Loading. 

RATE  -  MAKING  —  SPECIAL    AND    UNUSUAL 

CONTRACTS Pages  36-40 

Premiums  otherwise  than  annual.  Arbitrary  increase.  As- 
sumption that  the  deferred  premiums  are  credits.  Amount  of 
extra  charge.  Extortion  practiced  in  the  case  of  monthly  pay- 
ments. Excuse  for  large  addition  to  weekly  payments.  Return 
premium  charges.  Method  of  arranging  insurance  for  increas- 
ing amounts.  Its  application  in  return  premium  plans.  Install- 
ment insurance  really  for  a  discounted  amount.  Guaranteed 
interest  or  debenture  contracts.  Method  by  which  interest  above 
the  actual  guarantee  is  provided  for. 


157 

RATE-MAKING— THE  LOADING Pages  41-45 

What  net  rates  cover.  No  provision  for  expenses  or  variations 
in  mortality,  losses  on  investments,  etc.  EHzur  Wright's  con- 
tention for  the  necessity  for  loading.  Euture  premiums  will  be 
required  to  cover  future  exigencies.  Probable  attitude  of  Wright 
toward  contracts  for  permanent  renewal  commissions.  Loading 
,  is  usually  a  percentage  of  premium.  No  pretense  of  scientific 
accuracy.  Sheppard  Homans'  separation  of  elements  of  loading 
in  natural  premium  rates.  Expense  portion  a  certain  amount 
per  thousand  of  insurance;  portion  for  other  purposes  a  percent- 
age on  net  premium.  Necessity  caused  by  manner  of  paying 
conmiissions.  Homans  does  not  make  distinction  on  first  year's 
premium.  Margin  for  excessive  losses  properly  a  percentage 
of  term  or,  indeed,  any  life  net  premium.  Two  items  should  be 
kept  separate.  No  ample  provision  for  decrease  of  interest 
possible  except  by  assuming  a  certainly  safe  rate  originally. 
Present  practices. 

PREMIUMS— THEIR  COMPONENT  PARTS Pages  46-51 

All  premiums  on  policies  which  cover  the  contingency  of 
death  only  consist  of  two  parts,  loading  and  net  premium,  all 
of  which  is  solely  for  mortality  purposes.  Interest  is  required 
to  help  out  the  net  premiums,  which  do  not  fully  cover  the 
mortality.  Erroneous  ideas  of  the  three-fold  nature  of  such 
premiums.  Separation  of  net  premium  into  mortuary  and  re- 
serve elements.  Really  means  merely  money  to  be  expended 
to-day  and  money  to  be  expended  to-morrow.  Money  to  be 
paid  out  to-day  varies  and  the  reserve  varies  in  inverse  ratio. 
Really  no  distinction  between  the  two.  In  net  premium  no 
provision  is  made  for  anything  but  the  payment  of  losses. 
Exemplified  by  single  premium.  Reserve  comprises  all  future 
mortuary  demands  discounted.  Reserve  in  whole  life  and 
term  policies  is  to  make  good  the  deficiency  of  future  premiums. 
So-called  self-insurance  fund.  Actual  elements  of  whole  life 
net  premium  are  term  insurance  to  limit  of  life  and  pure  endow- 
ment premium  for  an  endowment  due  at  the  extreme  limit  ot 
life.  The  endowment  element  is  very  small,  being  but  one  cent 
at  age  50  for  an  endowment  of  one  thousand  dollars  due  at  age 
100.  Deposits  for  reserve  cover  not  only  the  reserve  on  the  en- 
dowment element  but  on  the  term  element  as  well.  Tables  of 
insurance  cost.  Elements  of  premium  on  endowment  insur- 
ance.    Cost  of  insurance  not  a  mortuary  element. 

RE-INSURANCE  RESERVES Pages  52—57 

Amount  formerly  left  to  companies.  Governmental  interfer- 
ence in  England.  American  tendencies  toward  recklessness. 
Part  of  Elizur  Wright  in  establishing  reserve  requirements. 
Peculiar  ideas  of  reserves.  Actuary  Nelson's  contention.  Wright 


158 

held  that  it  should  not  be  assumed  that  a  company  would  take 
another's  risks  at  a  less  premium  than  the  latter  was  receiving, 
nor  at  a  less  rate  than  the  net  premium.  Enough  must  be  re- 
served to  make  sure  that  an  average  company  could  afford  to 
re-insure  the  risks.  Example  of  a  one-year  term  policy.  One- 
year  term  and  single  payment  policies  give  no  difficulty.  In 
whole  life  policies  the  re-insuring  company  must  be  paid 
enough  to  make  good  the  difference  between  the  premium  on 
original  policy  and  premium  which  would  be  charged  at  in- 
sured's present  age.  This  is  the  present  value  of  an  annuity  for 
the  life  of  the  insured  equal  to  the  difference  between  the 
premiums.  If  premium  is  lower  than  net  premium,  an  annuity 
equal  to  the  deficit  is  also  charged  for.  Reserves  on  limited- 
payment  and  endowment  policies  calculated  in  similar  man- 
ner. Reserves  on  policies  paid  by  less  than  annual  premiums 
calculated  as  if  paid  annually  and  deferred  premiums  treated  as 
temporary  credits. 

SURPLUS— WHENCE  DERIVED Pages  58—63 

Three  sources  of  profit.  Two  simpler  are  from  higher  in- 
terest or  lower  expense  than  was  counted  on.  A  profit  from  in- 
terest must  be  practically  certain  or  rates  would  plainly  be  too 
low.  Such  was  not  always  understood.  A  company  with  a  six  per 
cent  reserve.  Gains  from  a  salvage  on  the  loading  should  be 
constant.  Extravagance  of  American  companies  makes  gains 
from  this  source  average  little.  In  some  cases  there  is  a  deficit 
to  be  made  good  from  other  gains.  That  amounts  to  an  as- 
sumption that  the  net  premium  is  more  than  equal  to  its  offices. 
No  gain  certain  from  loading  on  limited  payment  premiums 
when  not  all  expended  in  the  current  year.  Some  of  the  load- 
ing should  be  reserved  to  cover  expenses  after  the  premium-pay- 
ment period.  Savings  on  mortality  estimates.  Death  not  a 
chance  but  a  certainty— only  time  of  death  uncertain.  Apparent 
gain  by  saving  on  estimates  not  real;  gain  is  only  the  interest 
on  apparent  gain  for  an  uncertain  period.  No  provision  in  pre- 
mium for  paying  claims  at  another  time.  Real  gain  in  addi- 
tion to  interest  is  the  premiums  to  be  paid  by  those  who  do  not 
die  as  expected.  To  reach  the  deduction  to  be  made  from  the 
apparent  gain,  calculate  what  would  be  necessary  to  reinsure 
these  unexpected  survivors,  in  other  words,  the  :»-eserves  on 
their  policies.  The  same  is  true  in  endowment  insurance,  and 
in  term  insurance.  But  in  term  insurance  for  one  year  or  less 
it  is  otherwise,  such  being  renewable  if  at  all  for  the  future 
premiums.  So  the  apparent  gain  corresponds  to  the  real  gain. 
A  formula  for  ascertaining  the  surplus  earnings  of  a  company. 

SURPLUS— HOW  APPORTIONED Pages  64—68 

No  trouble  in  purely  stock  companies.  Life  insurance  natur- 
ally a  mutual  operation.     Logic  requires  a  system  which  will 


159 

induce  men  to  pay  ample  rates.  Competition  transferred  from 
price  to  cost.  Various  methods  of  dividing  surplus.  One  large 
American  company  employs  a  mysterious  method.  The  contri- 
bution plan.  Salvage  on  the  loading  in  proportion  to  the  load- 
ing, excess  interest  in  proportion  to  mean  policy  assets  and  mor- 
tality gains  in  proportion  to  tabular  cost  of  insurance.  Division 
of  premium  for  bookkeeping  convenience.  Net  loss  is  amount 
of  policy  less  the  reserve.  Hence  current  cost  of  insurance  is 
net  natural  premium  on  net  amount  at  risk. 

SURPLUS— HOW  AND  WHEN  DISTRIBUTED.  ..Pages  69—78 

Early  practice  was  reversions.  Soon  temporary  additions 
were  used  by  some  as  more  attractive.  Reversions  increased  re- 
serve values  which  companies  did  not  recognize,  but  forfeited 
same  with  original  insurance  upon  non-payment.  Recognition 
of  insured's  rights  in  this  even  after  non-payment  brought  about 
recognition  of  his  right  to  say  in  what  form  he  wished  surplus 
applied.  So  conversions  of  additions  into  cash  were  permitted. 
Actuaries  objected  on  the  ground  of  adverse  selection.  There- 
fore cash  dividends  became  the  rule  with  limitation  of  choice  of 
additions.  Dividends  also  applied  to  permanently  reduced 
premiums.  Also  in  reduction  of  premiums  for  a  fixed  term. 
Dividends  deferred  for  several  years.  Reason  for  such  action. 
Term  shortened'  in  answer  to  clamor  for  cheaper  insurance. 
Result  of  adoption  of  short  terms  is  that  not  all  surplus  is  divided. 
Cause  of  introduction  of  tontine  dividend  plan  was  lapse  rate. 
Real  cause  of  popularity  was  apparent  cheapness,  giving  an  in- 
vestment at  about  the  price  charged  for  life  insurance.  Long 
dividend  period  seems  the  only  feature  likely  to  prove  perma- 
nent. Hardships  of  forfeiture  largely  diminished.  No  apparent 
demand  for  relaxation  of  forfeiture  at  death.  Men  seem  to  feel 
that  to  survivors  belongs  the  surplus,  for  they  only  have  contrib- 
uted it.  Tontine  surplus  formula.  Great  latitude  given  in  ap- 
plication of  surplus.  Unfairness  of  charging  tontine  policy- 
holder full  participating  rates  for  non-participating  policy  while 
holderof  limited-payment  policy  is  furnished  a  participating  pol- 
icy at  the  net  rate.  Same  as  to  purchase  of  paid-up  annuity.  Ex- 
cuses for  this  course.  Long  dividend  periods  increase  safety  of 
companies.     Other  benefits  of  such  plan. 

EXPENSES— HOW  ASSESSED Pages  79-85 

Little  attention  from  actuaries.  Early  practice  to  charge  for 
expense  in  proportion  to  premium.  But  slight  variation  yet. 
Loading  considered  the  expense  element  and  expenses  charged 
upon  that.  Plan  proceeds  from  wrong  premises.  How  about 
cases  where  actual  expense  exceeds  total  loading?  Pressure  of 
brokerage  system.  Wrong  of  using  a  greater  amount  for  ex- 
penses because  of  age  of  member  recognized  by  Sheppard 
Homans.     Reported  recent  action  of  New  England  Mutual.     In- 


justice  of  practice  in  regard  to  single  premiums.  Injustice  of 
expense  charge  against  endowment  premiums.  Illustration  ot 
this  unfairness.  A  handicap  to  the  investment.  Cut  rates  in 
one  company. 

SURRENDER  VALUES  -PAID-UP  INSURANCE. .  .Pages  86-92 

Early  practice  was  forfeiture  upon  non-payment.  Not  pro- 
tested against  while  life  plan  was  universal.  General  feeling  of 
dissatisfaction  and  its  causes.  Introduction  of  investment  insur- 
ance created  demand  for  surrender  values.  In  which  case  anal- 
ogy was  with  purchase  of  property  instead  of  with  fire  insurance. 
Popular  indignation  in  England  and  America.  Elizur  Wright's 
work  in  Massachusetts.  Adoption  of  non-forfeiture  provisions 
by  the  New  York  Life.  General  acceptance  of  non -forfeiture 
principles,  checked  by  tontine  reaction,  but  now  universal. 
Variety  of  plans  for  determining  values  to  be  allowed.  In  case 
of  limited-payment  and  endowment  polices,  prevailing  method 
is  to  give  paid-up  insurance  in  proportion  to  number  of  premiums 
paid.  Simple  and  intelligible  formula  for  determining  the  proper 
amount  of  paid-up  insurance  due  upon  surrender  of  a  life  policy. 
Most  involved  formula  in  common  use  for  no  good  reason. 
Harsh  conditions  often  imposed.  Correct  formula  for  limited- 
payment  and  endowment  policies,  giving  a  less  value  than  the 
usual  plan  in  the  earlier  years  but  a  greater  in  the  later  years. 
Definition  of  net  single  premium  as  used  in  the  foregoing. 

SURRENDER    VALUES  —  EXTENDED    INSUR- 
ANCE     -     Pages  93—98 

Nature  of  the  reserve.  Origin  of  idea  of  extended  insurance. 
Grace  in  payment.  Arguments  pro  and  con.  Same  privileges 
allowed  upon  request  amount  to  discrimination.  Private  in- 
structions to  agents.  Grace  at  the  discretion  of  the  officers. 
Using  the  reserve  to  pay  premiums  on  the  original  policy. 
Elizur  Wright's  system  of  extensions.  He  prepares  a  complete 
table  of  net  single  premiums.  Assumes  that  sole  object  of 
policyholders  is  to  secure  insurance.  Missouri  only  compels 
extensions.  Adaptation  of  extension  system  to  endowments. 
Extension  is  non-participating.  Actuaries  object  to  extensions 
only  when  they  are  optional  with  holder.  Practice  of  Australian 
company. 

SURRENDER   VALUES— CASH Pages  99—103 

Formerly  if  given  at  all,  as  a  great  favor  and  not  as  a  right. 
Pretense  of  managers.  Originally  no  definite  idea  of  reserves. 
In  mutual  companies  the  insured  should  not  be  considered  to 
have  parted  with  the  ownership  of  his  money  becausehe  has  in- 
trusted it  to  the  company.  All  that  remains  of  it  after  j  ust  claims 
upon  it  have  been  liquidated  belongs  to  him.  Elizur  Wright's 
surrender  charge.     Possible  loss  by  adverse  selection  counter- 


161 

balanced  by  greatly  increased  cost  of  inducing  men  to  buy  a 
policy  which  means  great  loss  unless  completely  paid.  Danger 
of  run  upon  companies.  Such  danger  if  it  exists,  is  the  fault  of 
the  companies,  who  would  never  have  been  compelled  to  promise 
such  values  in  advance  had  they  shown  a  disposition  to  act 
fairly  without  being  compelled  to  do  so  by  the  letter  of  their 
policies.     Notice  is  often  required. 

PREMIUM  AND  OTHER  LOANS Pages  104—108 

Objection  of  adverse  selection  could  not  well  apply.  It  makes 
life  insurance  more  efficacious.  Investment  policies  will  con- 
tinue to  be  regarded  low-class  investments  so  long  as  companies 
discredit  their  own  promises  to  pay.  Objection  of  danger  of  a 
run  cannot  apply.  Reasonable  expectations.  Should  loan  to 
the  full  reserve  if  at  all.  Practice  of  banks.  Loans  to  pay  prem- 
iums. The  part-note  plan.  Notes  to  be  covered  by  dividends. 
Result  was  increasing  payments  and  decreasing  net  insurance. 
Loan  of  full  premium  upon  request.  Similar  loans  guaranteed 
for  a  fixed  term  of  years,  covering  all  premiums.  Diversity  of 
practice  of  companies.  Loans  from  50  to  90  per  cent  of  the  re- 
serve. One  company  discriminates  against  the  holders  of  ac- 
cumulated surplus  policies.  But  one  company  loans  the  full 
reserve,  and  that  only  at  five  year  intervals. 

POLICY  CONTRACTS— THE  APPLICATION..  .Pages  109— 115 

Reference  to  application.  Same  declared  to  be  warranty. 
Character  of  the  communications  and  promises  referred  to. 
Effect  of  a  warranty  to  render  the  importance  of  the  error  im- 
material and  the  sincerity  of  the  answer  unavailing.  How  they 
differ  from  representations.  Courts  and  juries  endeavor  to  undo 
the  wrong  of  such  a  stipulation  by  avoiding  the  condition  when- 
ever possible.  This  does  not  remove  the  odiun  from  the  com- 
panies which  retain  this  ancient  weapon.  If  company  cannot 
prove  fraud,  it  has  no  right  to  expect  men  to  believe  that  there 
has  been  fraud.  Illustration  of  the  defenceless  condition  of  the 
policyholders.  Assessments  and  fraternal  societies  even  greater 
sinners.  Results  of  the  practice  are  a  marked  preference  for 
companies  with  incontestable  policies,  adverse  legislation, 
attaching  a  copy  of  the  application  to  the  policy.  Application 
made  the  hiding-place  for  many  stipulations  which  companies 
would  have  been  ashamed  to  have  in  their  policies.  Policies 
free  from  conditions  while  the  back  (called  the  front)  of  appli- 
cations is  full  of  them.  Warrant  not  to  kill  yourself.  Waver  of 
statutory  rights  not  valid.     Many  other  obnoxious  conditions. 

POLICY   CONTRACTS— THE  PROMISE  TO  PAY 

Pages  116—121 

Fonn  is  that  of  a  simple  contract  like  a  promissory  note. 
Consideration  should  be  clearly  specified.     Mention  of  consider- 


16^ 

ation  should  come  first  in  the  contract.  Rigid  stipulations  of 
some  companies.  Time  of  payment  of  amount  of  policy.  Con- 
ditions limiting  time  for  filing  proofs  and  for  bringing  action 
for  recovery.  Place  of  payment  usually  home  office.  Conditions 
of  payment  are  so  manifold  and  complex  that  they  are  never 
given  in  their  proper  place,  near  the  promise,  to  pay.  List  of 
conditions  frequently  imposed.  Pleading  breach  of  conditions 
in  avoidance  of  claims  even  when  such  violation  had  nothing 
whatever  to  do  with  cause  of  death.  Suicide  clauses.  Military 
and  naval  service.  Custom  to  pay  a  surrender  value  upon  sur- 
render of  void  policies.  All  conditions  circumscribe  the  use- 
fulness of  insurance,  One  company  has  removed  all  conditions. 
Provision  for  cancellation. 

POLICY  CONTRACTS— TO  WHOM  PAYABLE.  .Pages  122—128 

Insurance  a  contract  of  indemnity.  Hence  not  given  to  per- 
sons not  interested  in  the  thing  insured.  Illustrated  by  fire  insur- 
ance. Interests  of  relatives  direct  and  collateral.  Certain  hard- 
ships. Interests  of  creditors  limited  by  amount  of  debt.  Interest 
in  one's  own  life.  Right  of  assignment.  Court  sophistry.  If 
assigned  by  beneficiary  must  convey  also  the  insurable  interest. 
Notice  of  assignment.  Survivorship  reversion.  Policies  payable 
to  devisees.     Not  good  as  against  creditors  of  estate. 

POLICY  CONTRACTS— SURRENDER  AND  LOAN 

PRIVILEGES Pages  129-135 

Non-forfeiting  means  a  variety  of  things.  At  best  it  means 
extension;  at  worst  a  small  paid-up,  non-participating  policy  if 
applied  Tor  within  a  short  time.  Characteristics  of  extensions. 
Paid-up  insurance  conditions.  Cash  surrender  privileges.  Pe- 
culiar action  of  a  non-tontine  company.  Custom  of  endorsing 
cash  values.  Old  part-note  plan.  Loans  to  pay  premiums 
only.  Loaning  all  or  any  premiums  after  a  fixed  date.  Loans 
without  dictation.  Foolish  and  annoying  conditions.  Loans 
usually  too  small  a  part  of  the  value. 

POLICY  CONTRACTS— SURPLUS  CONDITIONS .  Pages  136-141 

General  formula  to  determine  amount  of  surplus.  Made  a 
mysterious  operation  by  companies.  Retaining  a  surplus.  Con- 
ditions in  applications  of  several  companies.  Similar  clauses  or 
indefinite  agreements  in  most  policies.  Often  entire  silence  on 
the  subject.  One  company  refers  to  its  charter.  But  one  com- 
pany offers  a  definite  agreement.  Embarassment  in  introducing 
long  dividend  periods.  Built  upon  foundation  of  annual  divi- 
dends. So-called  profits  from  lapses  and  losses.  Peculiar  forms 
of  stating  this.  Surplus  applied  to  purchase  of  pure  endow- 
ments. Options  of  settlement  offered.  Income  options  often 
deceptive. 


163 

INSTALMENT,    ANNUITY    AND    TRUST    CON- 
TRACTS  Pages  142-148 

Value  of  human  life  not  expressed  in  a  lump  sum,  but  in  an 
income.  Contingencies  to  be  covered.  Former  methods  of 
meeting  this  fact.  Objections.  Modern  instalment  policies. 
Objections.  Charter  provisions  of  some  companies.  Provisions 
for  commuted  values.  Trust  agreements,  both  spurious  and 
genuine.  A  duplex  company.  Objections.  A  mutual  company 
with  trust  powers.  Trust  is  executory  and  does  not  vest  title. 
A  more  effective  provision. 

APPENDIX— SAMPLE  ANNUAL  DIVIDEND  POLICY  WITH- 
OUT CONDITIONS.  SAME  WITH  LONGER  DIVIDEND 
PERIOD  AND  OPTIONS.  SAMPLE  ASSIGNMENT  IN 
TRUST  TO  SECURE  INCOME  FOR  WIFE  FOR  LIFE. 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


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